Taxes, taxes and more taxes. Black holes, lack of fiscal sobriety and an IMF moment looming. Among the various gloomy forecasts for Britain’s finances, the only issues, everyone seems to agree, are: what novel new taxes might the Chancellor impose, plus, what existing taxes will the Chancellor increase, and by how much?
It’s a depressing narrowing of the debate on fiscal policy. In recent years, public expenditure as a percentage of GDP has risen from 35% to 45%, while in the past decade, the Office for Budget Responsibility has consistently underestimated, by between a half and one percentage point annually, what that increase in spend would be. With the economy not growing, and government expenditure rising, we can expect this share of GDP to continue to increase, especially as this Government’s only response to the growing cost of the state is to haplessly to search for more tax revenues to pay for those increases.
Despite today’s screeching U-turn by Rachel Reeves on her plan to raise the rate of income tax, the Government and the media have done a good job of preparing the country to expect massive tax increases – in some form – at the Budget.
But higher tax rates won’t automatically lead to equally large increases in tax revenue. Past a certain level of GDP, this assumption has forever been confounded by the pesky tendency of human beings to find ways of not paying them.
Leaving the country (the number of those departing, of all ages and income categories, is dreadful – yet continues to increase); some are ducking out to the underground cash economy (just look at your local high street for examples); others giving up work and retiring (the ‘great resignation’), or taking the Government’s not entirely unattractive unemployment or disability payments (117,000 new unemployed in the last quarter; 280,000 new economically inactive disabled in the most recently measured Q2 2023-24). All this, and more, leads to the Government getting far less tax revenues than pundits predict. And still the politicians don’t learn.
Yes, given the immediacy of the problems we face, it seems taxes will have to be raised in this Budget. The fiscal gap is widening, the need to raise more and more debt is increasing and the IMF is very unlikely to come to our defence if and as the international capital markets start declining to fund us. Even without a rise in income tax rates, no doubt a range of tax increases will be imposed, and businesses and the wealthy will be painfully hit.
Of course, which taxes are raised will relatively accelerate, or decelerate, our progress on the road to fiscal hell. Labour’s ideologues just can’t shake off their proclivity to punish business; the recent increases in taxes on enterprise (by the Conservatives too, in fairness) have been a key component of the developing economic fiasco. Taxes on consumption (rather than enterprise) are the least harmful to growth, but increases to those are in the main avoided like the plague; the hint that VAT might be increased is a rare sign of a small element of realism entering the debate inside the Treasury.
Whatever the detail, however, raising tax rates is like pushing on a string; in the end it will only lead to bad outcomes.
What’s to be done? A quick look at the UK’s private sector this century shows the scale of the problem. Suppressed as it has been by ever higher taxes and yet more burdensome regulation, and crowded out as it has been by the public sector, it has, per capita, grown by less than 1% over this past 25 years. Soon, as shown in the new book ‘Prosperity Through Growth’, we will have a lower GDP per capita than Lithuania, Saudi, Poland and Turkey. And we will get there all the faster if we continue to raise tax rates. Over and again, it is clear that it’s the public sector – government expenditure – that is the problem (even while its increase in size each year actually flatters the UK’s GDP growth calculation that year, since an increase in public spending counts as an increase in GDP).
This Government, like every government for the past 15 years, has said that public sector expenditure is too high. But not one in the past decade has set a target for how much cost needs to be removed, nor come clean on the enormous size of that needed cost reduction, nor how it would achieve those reductions. There are many cuts we need to talk about, yet few are prepared to talk about them.
We must cut unemployment and disability benefits by up to one third (Motability, anyone?). It is imperative that we get rid of the disastrous Net Zero programme and all its subsidies and other costs that have made electricity in the UK, whether for business or for individuals, just about the highest in the world. Slashing Civil Service headcount by (at a minimum) a quarter – something the private sector achieves by systematically setting targets across departments and enforcing the necessary headcount reduction. Selective but severe reductions to public expenditure, from 20% to 100% at each of the myriad of non-governmental organisations, quangos and charities that are paid for by the state. Any and all of this would meet with considerable resistance from multiple vested interests and virtue signallers, but at the end of the day, the Government would still be transacting its business, and the burden on the taxpayer would be sufficiently reduced to the degree that significant tax cuts, particularly of the type that would bring ambition and entrepreneurship back to the UK, would be possible.
We also need to talk about regulation. Just this July, the Chancellor said that she would ‘take the boot of regulation off the throat of businesses’. Did she mean anything at all by that? It seems that it was just a slogan. Nothing has happened; worse, every week, it seems, we get a new regulator, a further set of regulations and tighter enforcement. People can’t build, whether we’re talking homes or bridges or nuclear power stations – the engines of our growth. What was that about removing the boot of regulation, Rachel?
And then there’s the incoming Employment Rights Bill, which is going to send business growth into reverse. The regulation goes on, extending even to a Football Regulator (for which idiocy we can initially blame the hapless Johnson government, although Labour have of course made it far worse). Is regulation bad, as Reeves says, or desirable, as her and Keir Starmer’s behaviour suggests? The answer is of course that most of it is indeed bad; in my view it’s the worst of the unholy trinity of large government, high taxes and excessive regulation.
We have so many opportunities to do the things that will help the economy grow; but no matter how much this Labour Government genuflects to the acknowledged imperative of reducing spending and reducing regulation, it’s just not in the party’s DNA. No, one way or another, it has to be higher and higher taxes. Hang onto your hats: a storm is coming.
