Finding some relief: the case for applying fiscal discipline to tax expenditures

Even outside of tight fiscal times, institutionalising greater scrutiny of tax expenditures would be a goal worth pursuing. In the current climate, with so many extremely difficult and potentially painful choices to be made on welfare, public services and taxes, it takes on added urgency. There have been many calls for reform in the past, and many options presented, alongside best practice from abroad, as to how to deliver that increased scrutiny. A non-exhaustive list includes:

• Improving and expanding HMRC’s list of tax expenditures, including a greater number of costings and stating the intended purpose of each. The governments of Canada, Australia and New Zealand, at least, produce annual Tax Expenditure Statements. In some cases these include projections over the forecast period, which can later be compared to outturns, and could be accompanied by parliamentary debate.
• Developing a framework for HMRC’s own administration and monitoring of tax reliefs and their changing costs.
• Introducing a rolling programme of individual reviews – i.e. the government could regularly look at the effectiveness and value for money of each tax expenditure. In Canada, annual reports focussing on one or two tax expenditures are included in the Tax Expenditure Statement. Alternatively or additionally, new tax expenditures could be subject to sunset clauses, requiring demonstrations of cost-effectiveness if they are to continue beyond their initial period. On value for money, the question in effect is: “if this were a departmental spending programme – would it survive?
• Involving other departments in tax expenditure policy. The Public Accounts Committee recommended that “the cost of spending and expenditure on tax reliefs should be considered alongside one another in setting annual departmental budgets so that the true level of financial support to each area of public policy is transparent.” Similarly, the Centre for Policy Studies has suggested that “departmental budgets should be set both gross and net of expenditure on tax reliefs and exemptions”. In the Netherlands, each tax expenditure is reviewed once every five years jointly by the Ministry of Finance and a relevant spending department. At the extreme, departments would be able to freely budget between tax expenditures and regular spending.
• Continued scrutiny by the NAO. Its last review concluded that HMRC and HMT had left “a significant gap in accountability to Parliament” but it was accused by the government of working beyond its remit.
• Creating a joint parliamentary committee on tax policy.
• Expanding the role of the Office for Budget Responsibility (OBR) – which already looks, for example, at policy costings and welfare trends – or the Office of Tax Simplification (OTS), or the creation of a new body to specifically scrutinise tax expenditures.
• More broadly, reviewing the institutions of the Budget, Autumn Statement and Finance Bills, which allow for relatively little consultation, and the relationship between HMT and HMRC.