The first fiscal event to be delivered by a female Chancellor of the Exchequer is a landmark moment, but in every other regard this Budget was a return to the familiar, and failed, approach of Labour governments past. This was the Life on Mars Budget – a journey back to the 1970s, only without the cheap booze and fags. Tax rises, increased borrowing, a bigger state, spending on public services unaccompanied by meaningful reform and additional costs for those businesses which create wealth – we have seen all these before and we know they are the markers of decline.
This Budget was a journey back to the 1970s, only without the cheap booze and fags
Before the election there were signs that Labour’s leadership understood the need for a different approach. In a speech to the Resolution Foundation in December last year, Keir Starmer declared: ‘Anyone who expects an incoming Labour government to quickly turn on the spending taps is going to be disappointed.’ He appeared to understand that investment in the public realm should come not from increasing an already historically high tax burden, nor from borrowing when public sector net debt matches the entirety of the nation’s GDP. Instead, he argued, ‘growth must become Labour’s obsession’. It was acknowledged that only by liberating the private sector, maximising wealth creation and encouraging entrepreneurship would economic growth come which would, in turn, fund eventual investment in public services.
But now Labour seems to be setting out in almost the opposite direction, saying it is necessary first to spend, extravagantly and indulgently, in the public realm and if that requires businesses to pay more, then they should do so with a light heart. The means chosen – a rise in employers’ national insurance contributions – is defended on the basis that this is not a direct raid on the income of working people. But it will mean fewer people working and downward pressure on their wages. Raising taxes in this way may reflect an obsession, but not one with growth.
Other increases – whether the imposition of VAT on private school fees, alterations to the capital gains tax regime or changesto inheritance tax – can perhaps each be defended on their individual merits. But, cumulatively, they bear upon individuals who merit being treated with care because of their huge contribution to the exchequer.The wealthiest 10 per cent of taxpayers contribute 60 per cent of all income tax. The top 1 per cent pay 28 per cent. The 60 highest earners in the country contribute £3 billion in income tax revenue. Public sympathy for these individuals is limited, but what is not limited is their capacity to withdraw their capital, income and expenditure from the UK economy and the reach of HMRC. The evidence that not just plutocrats but also young entrepreneurs and talented figures in the tech world are relocating to jurisdictions with lower taxes and better climates is already concerning. That capital flight can only accelerate after this week.
The Chancellor clearly hopes that public sector investment, made easier by the relaxation of her borrowing rules, will provide the capital which really drives long-term economic growth. And the case for improving the nation’s infrastructure is compelling. House-building has lagged behind household formation for years, travel into and between our major northern cities is pitifully slow, and domestic energy generating capacity is well below what a modern economy requires. Faster house-building, major transport improvements and energy abundanceare all prerequisites for any increase in the trend rate of GDP. But, as pointed out by Samuel Hughes, Sam Bowman and Ben Southwood in the brilliant recent report ‘Foundations: Why Britain has stagnated’, the real challenge in delivering infrastructure across the UK comes in attracting more private sector investment, not expanding public spending. Public expenditure, after all, hasballooned on both HS2 and the Hinkley Point nuclear reactor, without any consequent improvement in national productivity.
Unlocking private sector investment in infrastructure requires a level of reform not yet attempted, indeed barely hinted at, by the government. The planning reforms so far floated may drive welcome additional house-building on greenfield sites, but the major blockers to development are the tangle of restrictions which spring from retained EU law, judicial review, the habitats directive, species licensing, carbon budget obligations and other environmental protections. A government obsessed with growth would take a scythe to them. But will this government, with so many other battles to fight, want to be seen as waging war on nature?
History tells us that the appetite of any government for radicalism only abates over time. So if growth really were this government’s obsession then the steps to accelerate it should have been taken this week. Instead another course has been chosen. A radical one, in its way, certainly. Tax, spend, borrow. Privilege the public sector over the private, favour increasing expenditure over structural reform, choose state direction of investment over markets freely allocating capital. Rachel Reeves has fired up her Quattro, but it’s heading straight for a brick wall.
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