28 October 2024

Good luck, Chancellor – you’re going to need it

By

Dear Chancellor: I commiserate. Karma is, indeed, a bitch. Here you are, having spent years complaining about the useless Tories, having done all the right disciplined electoral things to keep all sorts of flexibility up your manifesto sleeve, yet you now find yourself in exactly the same situation as what Sunak, Kwarteng, Hunt et al. had to endure.

It started off so well! Having been told you must look after your party’s core constituencies, you gaily lashed out massive pay rises to teachers, train drivers and the like. There was hardly a squeak of fiscal protest from anyone, merely praise that you had headed strikes off. But soon enough, retribution was building up; that cave-in on wages made it all the more urgent that you show spending restraint. Cue your announcement that you’d be withdrawing winter fuel allowance from most current recipients.

I can hardly complain about that; in my recently-published book, I pointed out that was one of the most obvious savings that a UK government could make. But then, my own little constituency is part of the ‘Thinker’ portion of humanity, where economic and logical rigour is the watchword of the day; yours is the ‘Feeler’ crowd, where ‘Be Kind’ shall be the whole of the law. To Feelers, there is nothing that government shouldn’t do for its citizens, so your taking money away from them became a shock-horror headline lasting for weeks; you risk ending up with the kind of tag name that poor Margaret Thatcher, milk snatcher, had to endure.

To be fair, the last 14 years of Tory power saw an almost unbroken chain of ‘Be Kind’, aka ‘Equality of Outcome’-driven governments, who shied away from doing any of the obvious things to get costs down. Now, you are as stuck as the Tories were, presiding over an overwhelmingly large, and increasing, level of annual government expenditure, while you feel – just as the Conservatives did – the hot breath of the OBR on the back of your neck, telling you that you must either spend less, or raise more in tax. 

You’ve already found that if you keep to the economic structure you have inherited, it will be pretty much impossible to find a way to spend less. You’ve done your best, of course, with the usual Treasury instructions to the spending departments to cut their outgoings by 15–20%; those departments have duly responded in the time-honoured way by complaining loudly and publicly about that, offering for elimination what aficionados of the game call the ‘bleeding stumps’, whose deletion would spark further outrage; you have in response taken the traditional next step, insisting those departments come up with things they could get rid of if they were forced to; they then moved to frustrate you on that by offering a further raft of items that it would be unthinkable to cut. (I give particular respect to perhaps the greatest proffer of that sort in the modern era, from Nick MacPherson ahead of the 2010 emergency Budget, who by his own account told George Osborne that if he wanted to cut expenditure by £90 billion, we would have to abolish the Royal Navy.) So, the best result you can hope for on outgoings, Chancellor, is stalemate; probably, it will turn out much worse than that, with your expenditure rising quite a bit due to your selling the pass via the excellently fudged claim that ‘investment’ is not ‘expenditure’.

It doesn’t matter whether it was the Treasury or the Office for Budget Responsibility (OBR) who have been coming up with your ‘black hole’ numbers, varying as they do from the fabled £22bn up to the new number of £40bn or more. The fact is, because our GDP per head hasn’t grown in almost two decades, there just isn’t the money for these fancy ideas. Other countries have grown richer. We haven’t. The money’s not there for us to spend. But you’re a socialist. You’re gonna spend more, come what may.

That means, in your model, raising even more in taxes. So what options are open to you? Here, the OBR is likely to give you more wriggle room as it judges your tax plans. You will increase a number of different tax rates, and proudly announce that this will lead to lots more tax revenues. The people who you will be seeking to tax are in the main the usual millionaires and the like: businessmen, entrepreneurs, high achievers, multinationals (‘don’t tax me, don’t tax thee, tax that rich fella behind the tree’). But that line, taxing the rich more, was already attempted by Sunak and Hunt in their respective stints as Chancellor. The fact that tax revenues haven’t responded in the expected fashion from their increases in various tax rates, especially their implementing higher rates on rich people and businesses, is precisely why these fiscal black holes are – so we are told – emerging.

By April 2024, the IMF was reporting that we had one of the largest fiscal deficits – 6% of GDP – out of the 40 major developed countries. Why, Chancellor, should you think your tax rises will turn the fiscal tide when those of your predecessors didn’t? Just the expectation of your imposing various tax rises has led to a torrent of those dastardly millionaires leaving the country; and it’s not just the rich who are leaving. High earners, higher achievers, our future entrepreneurs and business titans; all are flooding to leave the country, many in their twenties, thirties and forties, because – mirabile dictu – it turns out these people have their own opinions on this matter of allowing government’s clammy confiscatory hands to reach into their personal finances. These geese decline to be plucked any more, instead seeking more hospitable tax environments, whether in Australia, Dubai, Switzerland, the United States – even, good Lord, Ireland. Whatever actions you take, Chancellor, many of your intended prey have gone already; the threat of what you might do was enough to send them offshore.

No, you won’t get that much more in tax revenues from increasing these tax rates, Chancellor – even if the OBR’s model says that you will.

As it happens, there is a way out of this mess for you (although, fair do’s, both you and I know that it’s unlikely that you will go for it).

Politicians of all stripes, your party included, have said that the key to getting our country’s finances straight is to grow the economy faster. Your Prime Minister has said that he will focus ‘laser-like’ on growth; you much the same. There is only one small problem; none of you have come up with an explanation of why some advanced economies continue to grow fast, while for us, and for a goodly number of other countries – most of them situated among the original members of the European Union – GDP per capita growth has been pretty much non-existent for the last almost two decades – real wages in the UK are now, on average, a full 5% lower than they were 17 years ago. None of you offer a plausible theory as to what is holding our growth back; no formula demonstrating what actions will promote growth.

Well: I can tell you what the studies of the past few decades incontrovertibly say. Unless we completely change our economic framework, away from that EU social democratic model, our failure to grow per capita will continue. (Apart from, that is, your excellent promise to reduce planning regulation – which could, as and when you do it, spark a mini-growth boom. But your government, in the rest of the economy, looks like making regulation even worse, so net nul points on that.) Your party’s risible claims as to where you’ll create growth, such as that it will come from such chimeras as ‘Green Jobs’, are rapidly coming to be accepted as pantomime.

In fact, in my book ‘Return to Growth’, I show that there is only one set of actions that will restore our country to its former high levels of economic growth: get the cost of the state down, cut taxes commensurately and slash regulation.

Too hard? Honestly, the role for the state that my book envisages is not that fantastical; it just calls for a size of state, and tax rates and regulation, that pertained in the first few years of Tony Blair‘s government, before Gordon Brown went bonkers and threw money at everything. Moving away from that Tory-created, turn-of-the-millennium economy was what sent us up the Swanee. That was not so long ago; have we really changed so dramatically as a country that we can’t get back to those days? Somehow, we are now spending an extraordinary £300bn more than we would be spending, were the size of state expenditure the same as what it was in the first few Blair years. Why was it that we were doing fine as a nation then, with Things Only Getting Better, Britpop, Cool Britannia, you name it: why would it be impossible to get back to a state structure that looks like what we had then?

Of course, just about every step your new Government currently takes moves us further and further away from that turn-of-the-century Blair’s Britain. In particular, the quickest way to get our economy growing would be to make it easier to run a business by relaxing regulation; yet ‘Be Kind’ requires plentiful job-destroying regulation, such as the new workplace rules you’ve just introduced, which will put any sensible employer off from making any new hires until and unless they have no alternative. 

So no, you’re not going to get economic growth, not with these policies: you’ll implement lots of growth-destroying regulation; you’re going to be spending more and more money (it’s like the parable of the scorpion and the frog, it’s too much in your nature not to do that); and you ain’t going to be getting the increased tax revenues you think you’re going to get (read the section in my book on the modestly-named ‘moynicurve’ for details on that).

Net outcome of all this? Our national debt, already at 100% of GDP, will keep climbing up further, at a rapid clip. A former Labour Chancellor, Denis Healey, suffered the ignominy of having to go to the IMF for a loan. That was to a degree brought about by Heath’s and Barber’s earlier appalling economic incontinence, but regardless of who is to blame, either then or this time around (and there’s a whole lot of blame to be divided out), going cap-in-hand to the IMF is a fate that, if you remain as Chancellor for your full five years, you might well end up suffering yourself. It won’t be at all enjoyable, for any of us.

Go read my book; it might give you some ideas. I’m a congenial kind of chap, but unless you take a few ideas from it – after all, we showed ourselves as soulmates on the winter fuel allowance – I’m afraid that I’ll be reluctantly forced into punditising that you are beyond help.

Anyway, Chancellor, good luck!

Jon Moynihan’s book, ‘Return to Growth’, is published by Biteback.

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Jon Moynihan is a businessman and venture capitalist. He sits in the House of Lords as Baron Moynihan of Chelsea and is the author of 'Return to Growth: How to Fix the Economy'.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.