If Reeves really cared about the less well off, she would understand they can only be protected with an affluent and stable society, writes Ewen Stewart
On Wednesday Rachael Reeves delivers her second Budget. Last time she promised her substantial tax rises she said it would be the last. Unsurprisingly she is back for more and the reasons are entirely self-inflicted.
I wrote in September that the UK public finances were in an unsustainable state. Since then, it has become even worse with a further increase in borrowing of £17.4bn in October alone.
This is entirely self-inflicted because Reeves has killed growth, taxing employment and profits ever more highly while continuing to increase public spending in a totally unproductive fashion. GDP growth this decade per head has been negligible as a result of strangling the private sector to lavish funds on a highly inefficient public sector, and with that tax receipts have predictably not risen as expected.
We clearly don’t know what Reeves will do on Wednesday but it seems almost certain she will be back for more. Perhaps £20bn-30bn more. To be clear this will not solve her problems and we can be fairly certain in 12 months’ time it again won’t be sufficient. There will be negligible growth, spending remains weakly controlled and further tax rises will only exacerbate the exodus. Britain has entered a doom loop of ever higher taxes, regulation and no growth feeding on itself.
Reeves’s spending is out of control
The problem is obvious. Public spending is out of control. Spending is up almost eight per cent year on year for no obvious benefit. Indeed, according to the government’s own figures, public sector productivity is lower than it was in 1997. Yes, 1997. Quite extraordinary, as the digital age was barely born then.
We have swapped a productive public sector for an unproductive public one. The loss of growth is no mystery. It is simply down to chronically weak public sector productivity crowding out the private sector coupled. Add to that unprecedented control through regulation and an energy policy that renders industry uncompetitive through electricity prices that are literally 3x more expensive than the US.
It is not in Reeves’ DNA, but if we wish to break this doom loop the only effective way is to start to recharge private enterprise though undoing the excess of regulation, the grossly self-indulgent and costly energy policy and start to reverse substantial tax rises to give hope and encourage investment and job creation.
However, cutting taxes can only be achieved with fiscal stability. Borrowing a likely £160bn this year is neither prudent nor stable. This week the Growth Commission published its proposals to stimulate the economy.
How to invigorate the economy for everyone
In essence it calls for £105bn of public spending cuts, which sounds a lot but frankly is just seven per cent of total spending and only a third of the excess spending after inflation since 2020. The Commission proposes recycling half of public spending cuts into reducing the level of the deficit while the other half, around £50bn, would go into a series of measures designed to grow the economy rapidly.
Notably the Commission calls for abolishing stamp duty on property and shares, which we believe would be both self-funding through increased transaction and mobility, and the subsequent positive impact on employment and VAT tax receipts.
This coupled with reverting to the pre-2024 non-dom regime, abolishing inheritance tax (which counterintuitively is also self-funding given the incentive for the wealthy to flee to lands where there is no inheritance tax) and changing capital allowances to encourage investment will start to show Britain is open for business. With that, investment will start to flow and the doom loop would be broken.
The irony is Reeves seeks to protect the least fortunate today by cutting all our futures tomorrow. If she really cared about excellent public services and the less well off, she might start to understand they can only be protected in the long term with an affluent and stable society. She is putting the cart before the horse and with it creating a climate of despair.
Ewen Stewart is director of the Institute of International Monetary Research, University of Buckingham