Next week, Rachel Reeves will deliver her second Budget. The last one was supposed to draw a line under her tax rises and promote economic growth. Predictably, it did the opposite, as she focused on centralised statist solutions rather than promoting enterprise and prosperity.
We must await her proposals on November 26, but I strongly suspect she will compound last year’s errors with more substantial tax rises, regulatory impediments and continue to increase public spending with no consequent improvement in productivity. If she continues with this approach, the UK will remain in its economic doom loop of low growth and high taxes.
The backdrop to this Budget is year-on-year per capita GDP growth of around 0.6%; a fiscal deficit – despite material tax increases – almost £20 billion greater than this point last year; inflation is the highest in the G7; and the 10-year sovereign bond yield is at 4.5%, the highest of the major European countries by some margin.
By any analysis, this is a precarious position and one that is largely self-inflicted. To put this failure in context, if current trends continue, the UK’s GDP per capita will be exceeded by Poland’s by 2034, Turkey’s by 2043 and Malaysia’s by 2051.
It is self-inflicted because Reeves’s first Budget was manifestly anti-growth: taxing employment and profits, and increasing regulation – particularly relating to employment rights and energy policy – while unleashing public spending, which is up 7.9% in the year to date without any sign of an improvement in public sector productivity.
Today, the Growth Commission has published its plan to break the doom loop and re-establish both economic growth and some hope. We focus on three primary principles: curtailing excessive public spending to stabilise the fiscal deficit; recycling 50% of public sector savings into carefully targeted tax simplification to remove the greatest tax barriers to economic growth; and regulatory and supply side reform to encourage entrepreneurship. Creating a sustainable growth environment is the only long-term way to promote public spending. The current merry-go-round of tax, regulate and spend is totally counter-productive.
The cornerstone of a strong economy is sound money. The Bank of England’s Monetary Policy Committee (MPC) has singularly failed to achieve this, focusing almost entirely on consensual Keynesian thinking. It missed the growth in broad money supply, largely caused by its programme of quantitative easing which directly led to excessive inflation. The MPC absolutely needs a plurality of thought here, with monetarist and free market perspectives at the fore.
In tandem with stable monetary policy is sound fiscal policy. Running a fiscal deficit in excess of £150bn per annum against a backdrop of the highest taxes in proportionate terms since 1948 is untenable. According to the Office for Budget Responsibility, public spending has increased by over £200bn per annum in real terms since 2020, and it estimates that this will have increased to around £300bn by 2029. This is unsustainable, particularly with the state now accounting for not much less than half the entire economy, compared with around a third under Tony Blair. We propose that spending is reduced by £105bn per annum (around 7% of the total) by 2030, to be achieved by a mixture of public sector pay normalisation after rapid unproductive expansion, a focus on constraining rapid growth in the social protection budget and reducing the public sector headcount which has grown disproportionately since 2020. A sum of £105bn is around a third of the excess spending since 2020 and should be seen as a starting point, not an end point.
From our proposed cost savings, we would recycle 50% into stabilising an unsustainable fiscal deficit, with the remaining £50bn or so accounted for through carefully targeted tax cuts simply designed to most quickly and sustainably promote growth. To this end, we would abolish inheritance tax (IHT), abolish capital gains tax (CGT) on business assets held for over five years, increase capital allowances on investment structures to promote investment and abolish stamp duty on property and share transactions – as well as reverting to the pre-2024 taxation regime for non-doms.
Abolishing IHT is the stance currently taken by numerous countries including Hong Kong, Portugal, Sweden, Austria, Australia, New Zealand and Canada. It is not novel. The wealthy are mobile and their ability to pass on wealth is an important motivating factor in domicile and incentive to work in later life. We estimate that while the short-term revenue impact is £12bn by year four, the payback is 12 years and after 20 years there is a net £27bn revenue boost.
Similarly, by abolishing CGT on business asset sales held for five years or more, the motivation to invest increases and with it, intergenerational business development. We see this as a material break to help create what has been largely lost; a British Mittelstadt.
We see the proposal to abolish stamp duty on property and shares as a highly beneficial stimulant to both mobility and growth. While these taxes currently raise around £16bn on property and around £4bn on share transactions, we believe they act as a significant brake on growth. They are a major and growing impediment on transactions. The decline in stamp duty revenues would need to be offset from a rise in employment taxes, higher VAT receipts and the benefits of increased mobility. We estimate that this measure alone would increase GDP by 1.4% by 2031.
In addition to our proposal to cut spending by £105bn, we believe the Chancellor needs to focus on supply side simplification, notably by easing and streamlining regulation to stimulate activity. We focus on three primary areas: freeing up the planning system, addressing Britain’s totally uncompetitive energy costs and addressing what has become a highly regulated labour market.
On planning, it is becoming obvious that the UK’s infrastructure regime is not fit for purpose. Decisions often take years and regulatory burdens greatly add to costs. Simply look at the time it takes to build new homes, or worse, the UK’s record relative even to other European countries on infrastructure cost and delivery.
On Net Zero, Britain is the outlier and as a result has the highest energy costs in the G20, literally three times those of the United States. This hits the poorest families hardest and is latterly hollowing out British industry. The approach taken by the US, Russia, China and India to energy efficiency and low-cost power renders the UK’s approach entirely uncompetitive and counterproductive. We would repeal the Climate Change Act and associated legislation, instead focusing on providing energy security based on free market approaches. Britain used to be a net exporter of energy until recently; with a changed approach it can be again.
We propose scrapping this Government’s Employment Rights Bill, which we believe will act as an impediment to employment growth. The minimum wage too is now at a globally uncompetitive level and should be brought closer to international norms of around 60% of the median wage, compared with the current level of 67%. Allied to this is the need for increased incentives for the 9.1 million people of working age currently not engaged in the labour market.
This is a sorry situation. A generation ago, Britain had an economy that was the envy of Europe. It was relatively low-tax, fiscally stable, had a public sector that was reasonably effective and encouraged and received significant global investment. Today, on every measure, the opposite is true. In her last Budget, Reeves compounded this failure. We must begin reversing it. This can only be done sustainably with a dynamic economy led by the private sector and by trusting individuals, not constraining them. We believe our proposed Budget starts that process. It is a start, not an end point, but this doom loop must be broken.
