The problem with Rachel Reeves promising both ‘stability’ and ‘growth’ is that the two can be mutually exclusive. Governments do not create growth; businesses do and they rely on innovation and risk taking, says Alys Denby
Not since George Osborne’s ‘caesar’ cut has a Chancellor’s hair-do caused such a sensation. Did Rachel Reeves’ newly auburn locks mean economic warning lights flashing red or was the makeover a sign of a rosier future to come?
It turns out it was just a hair-dyeing mistake and one which she swiftly corrected. This is but the most trivial expression of a Budget run-up that has been characterised by feverish speculation and apparent U-turns. Both are the result of early missteps by the government.
Two early mistakes
The first was their manifesto commitment not to raise VAT, national insurance (NI) or income tax, which has resulted in ministers insulting swathes of the electorate they claim do not count as ‘working people’. Labour were consistently ahead in the polls during the election; they could have made a plausible case that Conservative cuts to NI were an unaffordable bribe to voters and should be reversed. Instead the Chancellor is left tinkering with less remunerative, more distortive taxes to get the revenue she says she needs.
The second was delaying the Budget until today, having won such a decisive victory in July. So far, the government’s biggest spending decision has been to cut winter fuel payments for pensioners – a move which, however sensible, gave a bad first impression. The resulting policy vacuum has been filled with rumours, conjecture and, yes, silly stories about hair.
Poor political judgement has material consequences
Such poor political judgement has material consequences. Reports that the Treasury was considering raising capital gains tax (CGT) as high as 39 per cent on top of abolishing inheritance tax relief (IHT) on AIM stock and global property have caused such concern in the City that the government has apparently stepped back from the brink. But that hasn’t stopped investors racing to dispose of assets, with the value of shares sold by directors of UK listed companies doubling compared to the first quarter of this year. Business confidence is at a four-month low and wealth managers say they are being inundated with queries from high net worth individuals wishing to leave Britain thanks to IHT changes. In a country where the top one per cent of earners pay 29 per cent of all income tax, such an exodus of wealth will be especially damaging.
So the Chancellor’s task today is not just to make her sums on tax and spending add up for the year ahead, but to reassure investors their money has a future here. Her central analysis that trustworthy leaders and reliable institutions are prerequisites for a successful economy is undeniably true. But Labour’s pretensions to probity are somewhat undermined by accusations of playing politics with the OBR and changing the fiscal rules to allow more borrowing when debt is already 100 per cent of GDP. And the problem with Reeves promising both ‘stability’ and ‘growth’ is that the two can be mutually exclusive. Governments do not create growth; businesses do and they rely on innovation and risk taking.
Yet as Shivani Menon and Andrew Barclay have written on these pages, Britain is especially cautious, with fear of failure 20 per cent higher than the global median. Too many businesses deliberately eschew growth to keep their earnings below the VAT threshold. And while the UK has great strength in start-ups, the challenge of scaling in this country is so severe that it’s colloquially referred to in the sector as “the valley of death”. As Menon and Barclay say in their report for think tank Onward, the UK’s “infectious culture of enterprise has steadily faded[,] and in its place lies a deep aversion towards risk and a knotted web of regulation”.
If Reeves can make a start unweaving this web today, businesses will thank her. Otherwise they’ll be tearing their hair out.