With a month to go, the budget is generating too much uncertainty

A big event is coming up at the end of the month and, alongside the Christmas items which I’m afraid are competing hard for shelf space in our stores, a lot of people are getting ready for Halloween. For many people, though, a scarier event is looming the day before.
The October 30 budget, announced by Rachel Reeves more than two months ago, has become a huge black cloud on the horizon. Everybody in business I talk to has concerns about what will be announced then. Many have put their own decisions on hold until they have seen what will be announced. Business confidence surveys consistently show a fall.
Some are taking evasive action in anticipation. I don’t have direct evidence that the private jets are already revving up for a quick getaway to sunnier and lower-tax climes, but some tell me that this is not far from the truth.
The countdown to the budget is firmly under way. A fortnight ago, the Office for Budget Responsibility (OBR) presented the first round of its forecasting assessment to the Treasury. Next week will come round two, followed in quick succession by rounds three to five. What there is not, though, is any lifting of the uncertainty.
Paul Johnson of the Institute for Fiscal Studies, writing in these pages on Monday, described how the chancellor and her Treasury officials and advisers are said to be looking at four different measures of government debt to guide decisions. One of them she inherited from the Tories, public sector net debt excluding the Bank of England, the others being debt including the Bank, public sector net worth and public sector net financial liabilities.
Each has its merits, and the last two could provide the tens of billions of additional headroom that a government wanting to increase public sector investment will be grateful for. The previous government’s debt rule, that the measure excluding the Bank should be falling relative to gross domestic product in the fifth year of the official forecast, irrespective of what happens in years one to four, had little to commend it, and was an open invitation to chancellors to game it.
Labour, however, committed itself to something similar in its manifesto, which apparently offered little change. It would also adopt a rule requiring that “debt must be falling as a share of the economy by the fifth year of the forecast”. Which measure of debt was not specified, though in opposition the chancellor hinted quite strongly that she would stick with the Tory measure.
The point is that we do not yet know, and to say Labour has been unclear about this is an understatement. This makes things difficult for experts trying to assess how much the government needs to raise taxes, and to what extent it can boost both day-to-day spending and public investment compared with the figures it inherited from the Tories. Economists have been forced into interpreting hints from Reeves about using the budget to boost investment to try to guess what this might mean for the debt measure she will adopt.
• Promises made by Rachel Reeves limit her room for manoeuvre
You will think this is very esoteric. Not many people spend evenings at the Dog & Duck debating whether public sector net worth is a better measure than public sector net financial liabilities or net debt, though they may have a sense that the new government plans to borrow more. The markets are probably getting that sense too. It matters, as does the lack of transparency. I presume the Treasury has shared its plans with the OBR or will do so next week.
Incidentally, before he took over as chairman of the OBR, Richard Hughes favoured one of these debt measures, proposing a rewriting of the fiscal rules to include delivering “an improvement in public sector net worth as a share of GDP over five years. This would incentivise prudent investment decisions to address the long-term challenges facing the UK.”
For most people, and many businesses, the uncertainty is more fundamental. Do entrepreneurs sell their businesses now in anticipation of an increase in the current 10 per cent rate for business asset disposal relief, the old entrepreneurs relief? Do private landlords sell up now to avoid being hit by an increase in capital gains tax on property sales? Some clearly are, and for them this would be the last nail in a coffin that has seen any tax advantages they used to have removed.
• Investors spooked by threat of Nightmare on Aim Street
This newspaper has reported the pall of uncertainty hanging over Aim, the alternative investment market, over fears that shares listed on the market are about to lose their inheritance tax exemption.
The point is that tax changes should not be seen as a “gotcha” moment, in which people and businesses are taken by surprise to extract the maximum in short-term revenue gains. Good budget-making, as followed by Reeves’s predecessors such as Gordon Brown, involved putting out complex tax changes for consultation, before they were implemented. A pre-budget report was followed by the budget itself a few months later.
The consequences of hasty decisions taken without consultation can already be seen in the few weeks since this government took office. Abolishing winter fuel payments for most pensioners looked better on the spreadsheet than it has turned out to be in practice.
Even before it has been unveiled, the chancellor’s ambition of imposing inheritance tax on the worldwide assets of “non-doms” looks to have been exposed as impractical, and it will be interesting to see what remains of it. That old quote from Jean-Baptiste Colbert, Louis XIV’s finance minister, springs to mind, that the art of taxation consists of plucking the goose to obtain the largest number of feathers with the smallest amount of hissing. There has been a lot of hissing already, and we have not yet had the budget.
It may be that, in the days leading up to the budget, most of the contents are dribbled out before the event itself. That has been the pattern for many years. That will not, though, compensate for the uncertainty created in the run-up to the chancellor’s first budget.