12 May 2025

The politics of contradiction have led us to decline

By

Like many observers of politics, I have puzzled long and hard over why politicians make the decisions they do – and in particular, why they often make decisions that are in bizarre contradiction to their declared aims.

Keir Starmer and Rachel Reeves’ mantra in the run-up to, and since, the July 2024 election was ‘growth’. They rightly observed that the UK was suffering from a long period of zero growth and stagnant real wages, and that if they could persuade the British public that they were the party of growth, they would be elected. It helped, of course, that the previous Conservative administration had claimed that they were also the party of growth (and had a history of being so), but did not actually enact growth-friendly policies – so the public lost trust in them. So far, so clear.

But I am trying to imagine what it was like in Cabinet or a smaller Cabinet committee when the 2024 Autumn Budget was being discussed.

PM: ‘So, Rachel, we need to prioritise growth in the budget. What have you got for me?’

Chancellor: ‘Hmm; I have asked the Treasury’s economists, and they are saying the evidence is that lower marginal taxes, particularly at the higher income levels (where there is more elasticity of labour supply), and lower taxes on capital accumulation, (where again there appears to be a high elasticity of investment and entrepreneurial activity with respect to Corporation Tax, CGT and IHT), both promote growth and higher labour productivity, and hence higher real wages across the economy. Oh, and they say that we should deregulate the higher-value-added sectors, like financial services, to encourage growth in those sectors. Oh, and cut Corporation Tax. Sorry, one more, and cut Stamp Duty, which will stimulate the housing market.  Last one – and reduce employment rights to allow easier hiring and firing.’

PM: ‘Can we afford to do all that?’

Chancellor: ‘Hang on. The Treasury people say that England’s highest marginal income tax plus NI rate is higher than the Laffer Curve’s revenue maximisation rate, which is apparently an all-up tax rate of 36%. Ours is currently 47% (+9% for graduates with a student loan); Scotland’s is higher. So lowering our highest marginal tax rate looks like it would increase government revenue in the medium term. So, yes, we can afford it.’

PM: ‘Do you think our people will like all that, Rachel?’

Chancellor: ‘No, they won’t.’

PM: ‘Hmm. OK, how about more public investment, more employment rights, and higher taxes on the wealthy and high earners. Will our people like that?’

Chancellor: ‘Yup – definitely.’

PM: ‘OK – let’s go with that, then. I’m not sure the Treasury economists know that much anyway.’

I know this is a spoof, but something similar, even if unspoken, is actually happening regularly in government.

Every economist knows that if you raise the costs of employment by raising employment taxes (employers’ NI in the case of the 2024 Autumn Budget), you will both reduce employment and lower wages. If you increase taxes on capital (Corporation Tax, IHT, Business Property Relief and Agricultural Property Relief), then the choice that employers and would-be employers (ie. entrepreneurs) make is skewed away from capital investment and towards hiring a greater number of lower-paid employees. Finally, if you increase employee rights, you add not only costs for employers, but also add a level of anxiety for smaller employers, who become frightened of their staff and the damage they could do with a discrimination or other legal claim.

So we can only conclude that the Government is not telling us the truth. And I don’t mean it is lying about some particular fact, it’s more that they are lying to themselves.

The Government is clearly not that interested in growth. In theory – yes, growth would be nice. But not actually in practice. Reigniting growth will need some unpopular decisions – announced and then carried out. For Labour supporters, the Treasury economists’ policies (that I have spoofed above) would be seen as betraying ‘working people’, and ‘lining the pockets of the rich’. Deep down, upsetting Labour’s natural supporters is something our current Prime Minister really, really does not want to do. So the untruth at the heart of this Government is that it is not actually ‘laser-focused’ on growth – it is actually laser-focused on keeping its tribe happy, and keeping enough support to win the next election. Whether or not its current policies will do that is anyone’s guess, but that is much more about political judgement than about incentives.

Does the same criticism apply in the same way to the last Conservative government? Yes, I think it does, but with more subtlety. The Conservative government’s tribe (if they had one) certainly contained a large number of business owners and managers, who would have agreed with the Treasury economists’ analysis. They told the Tories, vocally and often, that increasing regulation, employment rights and taxes would harm their businesses and damage their ability to improve their profits and raise wages. The Conservatives listened; said they wouldn’t do those things, and then did them anyway. Again, why? This time, it’s not about keeping the ‘tribe’ happy, but (bizarrely in my view) focusing on what pollsters, pundits and the media were saying was ‘popular’, and doing those things. The poster-child for this catastrophic way to run government is Stamp Duty.

I spoke to a Treasury minister at the time when Stamp Duty was raised to a top rate of 15% for second home owners, and was already 12% for everyone else. I complained bitterly about the absolute economic nonsense of this tax – heavily taxing mobility in exactly the people who are the engine of economic growth – young-to-middle-aged aspiring and successful couples wanting to live in London and the South-East. There, nice houses cost upwards of £1.5m, and a really nice house in a nice area in London costs upwards of £3m. Here’s the damaging bit – the minister wholeheartedly agreed with me, saying the tax makes no economic sense, and would raise little money in overall budget terms. They also said that the policy wasn’t going to change; that it was popular, and I just had to live with it.

It’s a devastating critique of government – politicians should either defend the tax in private as well as in public, or (in my opinion) vocally oppose it in public, and resign unless the policy was changed.

Indeed, the previous government is just as culpable as this one in saying one thing and then doing nothing to further its avowed goals. I conclude that modern democratic politics in Britain has become corrupted (or obsessed – choose your word of choice) by short-term vote-getting, and nothing else. I no longer believe that those in power really care about their electorate’s well-being; they only care about getting votes according to their own (flawed) judgement. I wish I believed differently, but the evidence overwhelmingly supports this view.

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Neil Record is a Trustee of the Pharos Foundation.

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