What would you like your government to do, above all, for you? Well, yes, safe streets, a predictable and peaceful future, fairness and the like, but above all, most people would like a return to the compact between government and population that existed in the 20th century, of steadily rising wages and wealth for each worker, and ever-greater numbers of jobs in the economy. In other words, economic growth. It used to be that even in the worst of times, voters could look forward with confidence to a future of available jobs and rising wages. Now, indeed for the past almost two decades, not so much. Instead, we have no GDP per capita growth, no growth in average wages, and a steady rise in the numbers of economically inactive adults.
Does it look like our current Government’s plans are going to alter that? After all, they have said that their number one focus is growth, growth, growth. You can see why they said that, because just about all humans want a future where they can strive, achieve, improve their lot and make life better for their loved ones. With no economic growth, that’s straightforwardly, mathematically impossible for the average family.
In theory, it shouldn’t be hard to get the economy going. First, figure out what conditions result in economic growth. Then, create those conditions. Countries around the world, such as Switzerland or Singapore, have found the trick – with the result that their citizens are streets ahead in terms of prosperity. But you do have to have figured out what conditions allow economic growth. Spoiler alert: it’s mostly just three things. Small size of government, low levels of tax and minimal regulation. Achieve those, and entrepreneurs are willing to step in and start up and grow businesses, hiring more and more people along the way. Simple. Governments don’t create jobs: private enterprise does.
The last 14 years of Conservative governments, with the vanishingly brief exception of the Truss premiership, failed to recognise that. Businesses were demonised and overregulated. Taxes were remorselessly increased. Starting in particular with Theresa May’s regime, the size of government grew and grew, with hapless politicians apparently unable to prevent the weekly increases, month after month, year after year, in the number of civil servants.
Let’s take what happened post-Truss. Corporate taxes were raised, windfall taxes drove business out of the UK. The simple act of making money – the flywheel of the whole capitalist system, that has created wealth for all around the world – was demonised, in industry after industry. Greater regulation on business was presented as necessary across the economy. The tax rises were presented as ‘grown up’ economic management, and we were told (in the Office for Budget Responsibility’s (OBR) forecast of November 2022) that the budget would be brought into balance by increasing tax revenues to 37.4% of GDP in 2023/24 – a new high. But since 2015, I’ve been pointing out, with the boastfully named ‘moynicurve’, that UK taxpayers respond with lower taxable activity, so that it has never as yet proved possible to get higher tax revenues than 36% of GDP.
Year after year, I repeat this point, which year after year is met with possibly understandable, but in truth foolish, indifference. Guess what? The outturn for tax as a percentage of GDP, 2023-24, was… 36.0%. And that 36% would have been even less had our GDP, the denominator, not stayed more or less flat during that period (just 0.2% growth overall, 2023-24).
So the result of the Hunt/Sunak regime was: pretty much zero GDP growth; much less tax collected than forecast; and a gap between government expenditure and government income that we had to borrow a further almost 5% of GDP to bridge, thus increasing the nation’s debt pile. Even inflation was some 2% higher than the OBR had indulgently forecasted for that Hunt/Sunak economic package.
That’s the economy that Labour inherited. The spend more, tax more and regulate more approach, not much different really than if we had stayed within the EU, had proven antithetical to growth, at a time when so many other countries, even the US under the chaotic supervision of the Biden regime, had grown steadily. Astonishingly, Britain is, on a GDP per capita basis, steadily poorer: now only about 20th among the 40 or so advanced economies; and we continue to fall further and further behind.
What is Labour doing about that? Do they have a theory as to what needs to be done to spark growth in our economy? They don’t. They have vapid, nonsensical slogans about Green Jobs and the like, but not once have they said: ‘X is what creates new jobs; here is how we are going to ensure X happens in our country.’ The reason for that is that ‘X’ is small government, low taxes and light regulation. All three are antithetical to Labour’s agenda and core supporters. If even the Tories couldn’t make a fist of that agenda, why should we expect Labour to even try?
Today, the House of Lords debates the heartland economic initiative by Labour: an increase in Employers’ NIC from an already historical high (thanks, Tories) of 13.8% to 15%. In my book, ‘Return to Growth’, I identify increases on core business taxes as the easiest way to damage economic growth. I also review the various specific setbacks that happened to the economy over the past few years when the Conservatives put business taxes, including Employers’ NIC, up: companies shutting down, companies no longer investing in the UK, small businesses not adding employees, strivers leaving the country; all resulting in the economy not growing, as detailed above.
The growth-destroying increase in NIC is just one of a litany of Labour anti-growth actions since they came to power. Have they even been ‘fiscally responsible’ in the view of the Treasury Orthodox? Hardly. Spending plans have increased by £70 billion. Tax increases only pay for just over half of that, leaving £32bn to be funded through further debt, and there are various initiatives, such as Great British Energy, which are not being counted as spending – but which certainly are. The biggest two of these ‘non-spends’ add up to some £14bn in unfunded costs, which, added to Labour’s £32bn increase to the deficit, comes to £46bn additional debt – which is, interestingly, £1bn larger than the £45bn in the Truss/Kwarteng mini-Budget which was said to have ‘crashed the economy’. Hmmm – and 10-year interest rates are now at 4.63%, compared to the allegedly economy-crashing 4.5% at the height of the mini-Budget alarms. Funny, that.
So, will the economy grow as a result of this Labour Budget? Well, computer says no – even though the OBR says yes. The OBR says that immigration, and we’re getting a lot of that right now, increases GDP. But it’s GDP per capita that we need to focus on, and if we get a net additional million immigrants (1.4% growth) in a year, then even a 1% growth in GDP – above the forecasts – still means a decline in GDP per capita. The average citizen is, by definition, going to get even poorer.
So it seems crazy, but what we have here is a government promising growth, while having literally no clue how to grow an economy and instead busily implementing policies that specifically prevent economic growth. Tax hikes, Net Zero policies, DEI, more and more regulators and quangos: every step seemingly aimed at shrinking, not growing, the productive economy. And this at a time when the rest of the world finally seems to be awakening from a decade of thrall to moral panics and left-wing governments.
Here in the UK, they don’t know what they’re doing, but they are successfully growing the debt pile, which bit by bit advances to the stage where the international markets will rebel, and refuse to fund us any more. Is such a refusal what it will take to start turning things around here? Is there no hope that a little less money can be squandered, that the tax burden can be reduced, that we no longer see more and more regulation as the answer to our problems? My book sets out a way to pick ourselves out of the economic hole we are in. I hope someone somewhere in the Labour Government is reading it.
Jon Moynihan’s book, ‘Return to Growth: Volume Two’, will be published by Biteback on January 14.
Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.
CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.
