Here is something you will not hear a lot of people say. If you are prepared to think counterintuitively, the Budget was better than expected for two sets of interlocking reasons.
First, it eschewed many of the wilder measures speculated about beforehand, such as a wealth tax, or dramatic increases in inheritance tax or capital gains tax.
Second, it consequently illustrated something more subtle. We are bumping up against the limits of tax and spend in this country, a process which began with the post-Brexit budgets, and continued during the Covid pandemic and then in the wake of the energy bailouts after Russia invaded Ukraine. Tax and spend could, at last, have reached its high-water mark, which means the tide may be about to start receding.
The limits on tax and spend are imposed not just by economists or by fiscal rules, but by the actions of markets, individuals and firms. In an economy which still has relatively well-functioning institutions with high degrees of trust, this presents an emerging opportunity for individuals, businesses, investors, for the new Chancellor Rachel Reeves herself – and also for whoever wins the Conservative leadership contest this weekend.
Let us first consider the measures. There is a strong case for arguing that both Labour and the Conservatives fought the election on false prospectuses. Labour tried to kid us all into believing it would not raise taxes and the Conservatives tried to deceive us into believing that their cuts in National Insurance were affordable and would not result in other taxes being raised or severe spending cuts which, in recent years, they have failed to deliver in practice.
In that sense, Labour’s increased taxes, increased spending and increased borrowing should, ironically, be welcomed. At least it is an honest indication of where we are and what is required if Britain persists in ducking the fundamental questions about dynamic, market-oriented reform which hang over the country.
Now we know. Without reform, including of health, infrastructure and energy policies, our economy is going to bumble along, struggling to create enough resources to go round.
That is not to say some Budget measures are not, in themselves, regrettable or reprehensible. I personally believe VAT on school fees, imposed effectively on children and on a service which is both compulsory and an established charitable purpose, to be objectionable. It appears the partial withdrawal of agricultural property relief from inheritance tax could force many small farms into closure as their owners retire. Jeremy Clarkson is already mobilising the yeomanry to oppose that. Good luck to him.
But for all the real pain in the Budget, we now know where we are. Businesses and investors can get on with life, rather than worrying about speculation on penal measures coming down the pipe. They can do so knowing there will be increased public investment and capital expenditure in health, education, and transport.
What about the limits of tax and spend? This is a more subtle argument. But you can already see by the reaction of the bond market in the last two months that investors are getting fed up with funding profligate governments, not just in Britain. The benchmark gilt yield, or interest rate charged by the market to HM Treasury, has risen from 3.7% to 4.4%. As all manner of financial calculations, including for mortgages, are priced off this number, Rachel Reeves has received a massive warning from the market: you cannot tax, spend and borrow any more without paying a fearful price. Let us hope she has noticed.
Related to this, individuals, families and firms are organising themselves like never before to minimise or reduce their high tax bills, empowered by attractive visa and low-tax offers from foreign governments, such as Italy, Greece and the United Arab Emirates and also by digital technology, which means we can all manage our affairs remotely.
The ultimate sanction of a citizen over the state is to leave, and Ms Reeves will know from updates from His Majesty’s Revenue and Customs that she can try to put up tax rates further if she wants to, but people will simply organise themselves to avoid her imposts. Many wealthy people, and not just ‘non-doms’, are moving abroad.
All this presents an opportunity for the winner of the Conservative leadership contest. The Starmer Government is unpopular, in part, because it is not actually that different from the Conservative regimes of recent years. It too is offering leftish economics, ‘levelling up’, Net Zero and authoritarian rhetoric on free speech.
The front runner in the Conservative contest is Kemi Badenoch. It is encouraging that she has been espousing a different, traditionally liberal conservative economic credo based on strong institutions, orderly, regulated markets and social trust. She cites the work of Daron Acemoglu, Simon Johnson and James A. Robinson, who all recently won the Nobel Prize for Economics for exploring how good institutions underpin prosperity.
They examine, for example, how the British economy and the Industrial Revolution took off after the Glorious Revolution of 1688. This initiated a period of robust institutional formation based around parliamentary sovereignty, a limited monarchy, the rule of law, reasonable taxation, an open trade policy and an independent central bank. These principles, familiar to readers of Hayek, Smith and Burke are, thankfully, coming back into fashion.
The British economy has been battered by circumstances and mismanaged in recent years. But it is far from being wrecked beyond repair. For those of a contrarian mindset, now is the time for some optimism. We have not entirely forgotten what powers the wealth of nations.
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