Mini-Budget Opacity Resembled ‘Failing State With Barely Functioning Tax System’

Mini-Budget Opacity Resembled‘Failing State With Barely Functioning Tax System’

The economic turmoil following Kwasi Kwarteng’s statement showed why tax transparency is essential, argue Andrew Baker and Richard Murphy

The Government’s now-notorious ‘mini-budget’ of 23 September is a salutary lesson to governments around the world about what can go wrong when a non-transparent approach to tax policy is adopted.

The events of the last week are a powerful advertisement for governments of all hues to follow good international practice on fiscal transparency.

The largest package of tax cuts in 50 years announced suddenly at a time of inflation, concentrated on high income groups, made it one of the most radical fiscal events in British history. It was accompanied by little explanation, data, or consultation. Chancellor Kwasi Kwarteng’s budget statement was a textbook example of what governments should avoid when formulating tax policy.

Imagine for a moment, a world where governments agree they should follow principles on due process, data requirements and clearly explained tax policy objectives before announcing fiscal packages. In an ideal world, such processes would form part of a more general commitment to nurturing country-wide debate on the value and importance of tax policy as a public good for delivering prosperous, sustainable and inclusive societies. In such a world, the debacle and embarrassment of the last week could have been avoided.

In modern Britain, that sounds like a pipe dream – light years away.

Yet, it is precisely this world of good tax governance that the major multilateral institutions (the Organisation for Economic Co-operation and Development, International Monetary Fund, and World Bank) have been working to cultivate. We got a flavour of it when the IMF called the Kwarteng package “untargeted”, working at cross purposes to monetary policy and likely to “increase inequality”.

There are multiple advantages to governments following a comprehensive and systematic approach to tax transparency. These include: improving tax system performance in meeting stated policy goals; enhancing tax morale, the willingness of people to pay tax, and public trust in and the wider legitimacy of a tax system; and managing expectations by signalling to markets and other stakeholders the direction of policy travel, the reasoning and calculations behind it.

Tax transparency for governments has until recently received much less attention than the need for transparency by corporations and those availing of tax havens. International transparency standards addressing those matters now operate through various mechanisms. The Truss administration has demonstrated why transparency from governments on their tax policy is equally important. 

Reckless impetuosity has become an unfortunate feature of the governing style of administrations on both sides of the Atlantic in recent times, especially on tax. Hastily assembled fiscal gambles such as the Kwarteng package can harm the long-term economic prospects and standing of a nation, threatening international contagion and international prosperity and stability.

The British episode raises the question of how can the international community discourage reckless measures that pose such risks merely to further enrich small numbers of the already wealthy?

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Towards a Solution

Fortunately, such a mechanism has recently been developed. On 2 August, the General Council of the Annual Stewards Meeting of the Global Initiative for Fiscal Transparency (GIFT), which includes the IMF, the World Bank and the OECD, unanimously approved a new set of transparency principles for tax policy and administration.

Had these principles been in widespread use in recent weeks, it would have been clear that Kwarteng’s package breached the majority of them, potentially sparing UK consumers, householders and businesses disastrous consequences.

The Government failed to ask the independent Office of Budget Responsibility (OBR) to cost its tax cut plans, or publish any accompanying estimated data projections, (something that has become standard practice in British economic policy).

The proposal is reported to have been subject to a mere two hours of discussion with limited ministerial colleagues. Policy, accompanied by limited data, explanation, and devoid of parliamentary and external scrutiny is, as we have seen, a recipe for market turmoil, economic hardship, international disquiet, while increasing the potential for policy U-turns.

Even the three most basic of the new principles – the right to information on tax measures, inclusive consultation, and attaching clear objectives and estimations of future revenue to tax measures, were breached in the Kwarteng package. In total, 10 of the new 14 principles relevant to last week’s announcement were breached.

As contributing authors of the new principles and their underpinning research, we would only expect to see such a level of bad performance in failing states beset by corruption, with barely functioning tax systems.

Liz Truss and Kwarteng have demonstrated the need for even major economies to be discouraged from embarking on reckless tax debacles. The rise of ideologues and opaque lobbies makes this more urgent. International tax transparency principles can reduce the potential for such harmful episodes.

Professor Andrew Baker and Professor Richard Murphy are academics at the University of Sheffield