David Gauke – 2011 Speech to the Tax Journal Group

Below is the text of the speech made by the then Exchequer Secretary to the Treasury, David Gauke, to the Tax Journal Group on 9th November 2011.

Good afternoon, and thank you for inviting me to speak here today. It’s a pleasure to speak to so many of the leading legal and business executives from the tax industry.

The businesses that are represented today from the backbone of our economy, and are the driving force for our recovery.

Your companies and your success are critical to meeting the growth challenge, creating the jobs, driving the investment, and stimulating the innovation that we need.

But the businesses here today, and the businesses represented on the panels throughout this conference haven’t assumed the position of domestic and global leadership through mere luck. They have done so through enterprise and ambition.

And it’s the same endeavour that this Government supports to lead us through tough economic times.

It’s no small challenge. We are still in the midst of an economic crisis that stretches back three years. What was once the worst financial crisis in almost a century, a crisis of private and banking sector debt, has transformed into a crisis of sovereign debt.

The focus today is on Greece and Italy, but it’s easy to forget that when we came into Government there was much concern about the UK’s fiscal credibility.

Because we inherited a dire economic situation. The largest peace time deficit the country had ever seen, borrowing one pound for every four that we spent, with Standard & Poor’s putting our AAA rating on negative watch.

But through the toughest Spending Review in decades, we set out plans to eliminate the structural current budget deficit by 2015.

It was a plan that meant S&P took us off negative watch. It’s the reason the market continues to back our debt, with gilt yields falling record lows in recent months. When we came to Government our rates were tracking the likes of Spain and Italy. But we managed to break rank, and now we’re tracking the likes of Germany.

And those low interest rates make a real difference to businesses refinancing debts, and households paying mortgages. An interest rate increase of just one per cent, would take as much as £10bn out of families’ pockets, and would bring unbearable pressure on businesses across the country.

Fiscal consolidation is not an ideological commitment it is an economic necessity. And as we face continued instability, now is not a time to change tack. We have to stick to the plan and we will.

But fiscal consolidation begs the fundamental question…where should the burden lie? Spending or taxation?

In our Spending Review we were clear…the burden would fall on spending. Restoring spending as a share of the economy to a level closer to its historical average.

All the international evidence and experience suggest that consolidation through spending restraint would be more likely to promote growth.

Hand in hand with that, we have to ensure that we have a tax system that supports our businesses.

In today’s globalised economy, tax competitiveness is arguably more important than ever.

After years of tariff reform, technological advance, and information revolution we are operating in a much more fluid world economy.

Globalisation and the free movement of capital and labour have created vast new opportunities, and indeed the UK has capitalised on these. And in difficult economic times like these, free and open markets are the most powerful tool that we have for a global recovery.

But globalisation also brings challenges…where our competitiveness slips, we can very quickly be left behind. And more often than not, business success in the UK has come in spite of rather than because of our tax system.

In 1997, the UK had the tenth lowest main rate of corporation tax in the EU. But by the time we came to office, we’d slipped to 20th

According to the World Economic Forum, on an overall measure of competitiveness, in the last decade we slipped from 4th to 12th in the global league table.

We are committed to reversing the decline that has marred the last decade or so.

First and foremost that means making our tax system an asset. Making sure that we have a tax system that supports growth and doesn’t stand in its way.

Our ambition is to create the most competitive tax system in the G20.

This is a big challenge. But it’s one that we can meet even as other countries rise to the task.

In fact I was struck by comments by the former Labour Cabinet Minister, James Purnell in an article in the Financial Times only last week. In it he argues that the British state has is ‘good at fixing problems’… Thatcher after the Winter of Discontent, Tony Blair on the health service, and he also lists, the Chancellor George Osborne through the deficit reduction plan.

Compare our resolve in tackling our deficit with the fiscal deadlock in the US this summer, or the monetary hesitancy in the Eurozone. In James Purnell’s words, not mine, “Britain’s state governs. It’s one of Britain’s real competitive advantages.”

We are committed to creating a tax system which is competitive and stable will provide business with the confidence to invest and expand over the long term.

Higher taxes on profits simply make the UK business environment internationally uncompetitive…reducing the returns on, and the incentive to invest…undermining productivity to the detriment of our private sector and our wider society, rich and poor alike.

That’s why we are reducing the main rate of Corporation Tax by 2014 it will reach 23% – the lowest rate in the G7 and one of the lowest rates in the G20.

We are resisting the European Commission’s proposals for an EU financial transaction tax. Whilst we support the idea in principle, it can only work if implemented globally. Even the Commission itself estimates that the current proposal could reduce EU GDP by as much as 3.4% of EU GDP, that’s €422 bn. And, as the Chancellor said in Brussels yesterday, the tax will be paid by pensioners not by banks and bankers.

Furthermore, as a home to many of the world’s biggest Multi-national companies, our approach to tax needs to reflect the realities of dealing with companies stretching around the world and over different jurisdictions.

A competitive tax system should recognise that fact.

Central to doing that is a move towards a more territorial system of taxation.

That is why we have taken steps to reform the taxation of foreign branches, introducing an opt-in exemption from corporate tax for the profits of foreign branches of UK companies.

And it’s why we are also taking action to improve the Controlled Foreign Company (CFC) rules… rules that have been in place since 1984 and have become outdated.

The consultation on new CFC regime closed at the end of September and I would like to thank all those who have contributed to the debate that has taken place over the summer. You have given us much to think about and I am grateful for the level of engagement from the industry, including from many of you here today.

There will be an update on the CFC proposals in the next few weeks, ahead of the publication of draft legislation, and we remain determined to embed a competitive CFC regime.

However any reform to the tax system has to consider the issue of fairness alongside that of competitiveness.

Facing the deficit that we do, we have had to make difficult decisions on tax….decisions that at times necessarily involve a trade off with competitiveness. But decisions that nonetheless ensure that we embed a tax system that is fair.

Firstly, we inherited the 50p rate of tax from the previous Government.

And we have kept the rate as a demonstration of our commitment to share the burden for reducing the deficit. But we nonetheless understand that higher marginal tax rates are not good for the UK.

We believe that making this permanent would do lasting damage to the UK’s economy which is why we have repeated that this is only a temporary measure.

Secondly, the bank levy.

We believe that it’s right that banks make a full and fair contribution to cutting the deficit, and a fair contribution in respect of the risks they pose to the UK economy.

It is also intended to encourage banks to move to less risky funding profiles. Encouraging them to look to more stable sources of funding rather than flighty short term funding. Because as we saw in the crisis, a liquidity shock can all too easily turn into a system wide seizure.

Banks need to be more resilient to those shocks. Look to secure stability for the long term, working with the grain of our wider reform programme, to underpin a sustainable and stable economy.

But the levy balances that imperative, with our commitment to maintaining the UK’s presence as a leading, global financial services centre.

In delivering tax policies, there are times where it is necessary to make trade-offs.  There are times when different objectives take us in different directions.

But I think it was helpful for the Chancellor, in his March Budget, to set out his principles of good taxation for a modern age.  They are that:

Our taxes should be efficient and support growth.

They should be certain and predictable.

They should be simple to understand and easy to comply with.

And our tax system should be fair, reward work, support aspiration and ask the most from those who can most afford it.

I have said something about how we have made our tax system more efficient and growth supporting.  And about the need for fairness.

But let me say a little about certainty and predictability and simplicity.

Because there are always pressures to add to the complexity of the tax system.  Usually, this is as a consequence of the belief that the tax system should be used not just to raise revenue but also to achieve other policy objectives.

And, of course, there are times when tax can do just that.  For example, it is legitimate for the tax system to encourage expenditure in research and development.

We know that there is a market failure that needs to be corrected because firms reinvesting in R&D cannot capture all the benefits that accrue from investment in this area.

And there is a place for using the tax system so that externalities are incorporated into the cost of a good, for example.

But there are those that argue that we can go further, that we distinguish between ‘good’ and ‘bad’ business practices and tax them accordingly.

On examination, this raises many issues.  Some would say that we should favour ‘long term investment’ versus ‘short term speculation’.

But should the tax system encourage people to hold onto an investment for longer than they want to solely to benefit from a tax break?  That would damage economic efficiency.

We could see whole business models facing a changed tax regime because of the activities of one or two businesses that attract negative headlines – thus damaging predictability.

And the history of providing tax breaks to encourage particular types of behaviour has often resulted in avoidance opportunities that have proved to be very expensive.  Which was then followed by complex anti-avoidance provisions.

There is always a risk that attempts to use the tax system to influence behaviour can result in additional complexity and uncertainty for businesses.

So, for the avoidance of doubt, it is not the Government’s attention to assess all businesses and divide them into producers and predators.  And then apply different tax rates to them, perhaps with a ‘predator surcharge’.

Of course, such an approach would place considerable extra demands on HMRC.

HMRC already faces a substantial and difficult task to effectively protect the tax base, ensuring that businesses and people pay what they owe.

We want a tax system that supports business, that demonstrates that the UK is open for business, but doesn’t leave the tax base open to exploitation.

It’s impossible to protect low and competitive rates, if we’re not prepared to protect the tax base.

This isn’t something that can be achieved through sabre rattling however.

How companies experience the UK tax system is as important to tax competitiveness as the headline rates that we set.

It means that our approach to tax collection has to be as intelligent as it is vigilant.

That’s why I support the work of HMRC’s Large Business Service. And it is why I think it is right than an approach of constructive engagement between HMRC and taxpayers is in the best interest of maximising revenue collection, and expanding business activity in the UK.

It’s an approach based on cooperation and trust. Trust from Government in business not to engage in aggressive avoidance. And trust from business in Government and HMRC to treat them fairly and work in complete confidence.

With ever increasing complexity of business affairs, increased cooperation is the only route to efficient and competitive tax systems. It goes hand in hand with the headline reduction in tax rates.

We’ve come a long way in the last year alone to restore UK competitiveness.

Indeed, according to the World Economic Forum, for the first time in a decade the UK has moved back into the top 10 in the global competitiveness index.

But we still have a long way to go, and in difficult economic times it is vital that we work together to understand what more, or indeed what less, our Government can do to boost competitiveness and promote growth.

I look forward to working with you all in the years to come.