Ever since the Labour Party conference in late September there had been ominous rumblings that anything up to an additional £50 billion might be made available annually for infrastructure expenditure by the alchemy of ‘freeing up the rules on Treasury borrowing’.
Whenever Chancellors claim – usually in the run-up to a budget – that ‘fiscal headroom’ has miraculously been found for yet more public expenditure, it is time to count the spoons. A tell-tale sign is when they earnestly describe what they are doing as ‘investment’ rather than spending. Lest I am accused of party-political bias here, I should confess that I have made this point in the run-up to umpteen financial statements over the years; furthermore a succession of Conservative chancellors have been amongst the worst serial offenders. The most notorious instance came a little over two years ago when Kwasi Kwarteng’s brazen borrowing blitz so terrified the bond markets that what was left of his party’s reputation for economic competence was eviscerated.
In truth the UK collectively continues to live hugely beyond its means; for the first time since we were still paying down war loans public sector net debt has topped 100% of GDP. There is no meaningful ‘fiscal headroom’ for yet more borrowing. In choosing to do so we pass on higher debt to future generations and run the real risk of higher long-term interest rates as we service it.
I suspect this explains why the naturally orthodox and cautious Rachel Reeves took some heed of expert warnings. In deciding against restating the value of less than reliable financial assets such as the student loan book, roads and railways, she trusts that the capital markets will be reassured and retain their faith in the UK economy. Nevertheless, the loosening of the Treasury’s debt rules still means that the mood of market investors will be watched nervously from Westminster in the days ahead.
Prioritising growth lay at the heart of the economic ‘change’ promised by the new government. Yet a warning shot has already been fired by the politically neutral Office for Budget Responsibility (OBR) whose downgrading in growth projections highlights the incompatibility of that aspiration with much of the swathe of worker-friendly changes to employment law already announced, not to mention the Chancellor’s uplift to the minimum wage at three times the rate of inflation and unprecedented surge in rates of employers’ national insurance. More conventionally the government’s intention to boost GDP hinge upon a once-in-a-generation liberalisation of the UK’s notoriously restrictive planning regime; a more relaxed approach to skilled migration and a reliance on the transformational potential of artificial intelligence, broadband technology and green energy. Watch in the forthcoming Finance Bill for an urgent priority to level up through free investment zones; we may even see a rebranding of the previous government’s freeports policy which was essentially stillborn during the political chaos of recent years.
It is only fair to acknowledge that a considerable amount of intellectual underpinning has gone into the Labour government’s determination to handle the fiscal pressures of an ageing society and the challenge of raising levels of both public and private investment. Much of this has emerged from US centre-left academia and has already been eagerly adopted under the Biden administration. ‘Securenomics’ seeks to spur growth by boosting labour supply and raising productivity, whilst reducing inequality and environmental harm. Expect to hear much more emphasis on the growth potential of sustainable finance, green monetary policy and a revamp of ESG as more meat is put on the bones of Ed Miliband’s GB Energy initiative.
The purpose of growth will be expressly more ‘mission-driven’ and ‘goal orientated’. Meanwhile in the months ahead the Treasury narrative will hinge on the good that government can do leading with purpose and governing in partnership with business. I suspect this will be coupled by a more open acknowledgment of the UK economy’s strengths and weaknesses. For better or worse over recent decades the UK has become a broad-based, generally high value added service economy. Harking back to the days of replicating German levels of manufacturing production, even of the highly automated-style now in vogue, are behind us – never to return.
Even without the benefit of hindsight it is evident that too much expectation has been pinned onto this first budget of the new Labour administration. Unwelcome uncertainty has been generated by the unnecessarily long period that has elapsed since the General Election. Too many half-announcements made over the last few months have unravelled almost as soon as they have been made. The febrile mood and instability this has engendered has already impacted on foreign direct investment; the generally well received International Investment Summit that the UK hosted earlier in the month was somewhat overshadowed by policy confusion and controversy. In the meantime professional advisers have been able to force the Chancellor to water down some of the more eye-watering proposals for hikes in capital gains and inheritance tax.
I suspect it has been sobering experience for the new economic ministerial teams to realise that there are very few easy wins when it comes to boosting growth and productivity. The workings of global markets dictate that the UK tax code should never veer far from that of our closest international competitors. Labour’s instinctive desire to equalise the fiscal burden between labour and capital is probably incompatible with the promotion of a culture of entrepreneurship.
Besides there are simply insufficient super rich on British soil to plug the existing holes in the public finances – and those who reside here are markedly more mobile than the rest of us if they are expected to pay vastly higher levels of tax on their wealth and assets. The evidence here is already well beyond the anecdotal. Many highly skilled professionals, including UK nationals, have voted with their feet as the uncertainty about taxation has swirled in recent months. In the aftermath of this budget, as its impact becomes clear in the cold light of day, others may well follow. Their previously substantial personal contribution to Treasury coffers – not to mention the upkeep of public services, which they often barely use – risks being lost to a variety of lower tax jurisdictions.
At first blush raising levels of Inheritance Tax may appear an equitable means of correcting the social injustice of unequal opportunity, but subjecting resident non-UK nationals and AIM shareholders to it will almost certainly result in both lower overall levels of tax paid and damage to the most growth-orientated of our public markets.
It is almost certain that more amelioration measures will quietly be made in the weeks and months ahead, but regrettably the reputational damage in the eyes of international wealth creators may have already been done. Despite frequent Ministerial protests to the contrary, the overriding impression in recent months is that the UK has become a relatively less welcome haven for international business and investors than it once was.
This has been a less than exemplary method of policy design and it almost makes me nostalgic for the days when the clunking fist of Gordon Brown ruled the roost at 11 Downing Street. Say what you might, he at least recognised that a proper budget-making process involved far-reaching tax changes being put out to extensive consultation and being subject to regulatory clearance and scrutiny by the financial services community before implementation. The unpredictability generated by the running commentary that has taken place as budget day has approached also reflects the undesirability of complex tax changes being made on the hoof. This sorry process started during this summer’s General Election campaign in which remarkably little scrutiny was paid to virtually any aspect of the economic programme proposed by the incoming government despite its election to office being regarded as a racing certainty.
Little attention will be paid to the set-piece parliamentary debate that will follow in the days ahead. For now, the Conservative brand remains badly damaged in the eyes of the electorate, irrespective of the personnel leading the party. The Liberal Democrats are already patiently building for the future with characteristic opportunism as they position themselves as the local saviours of their newly won Home Counties voters, opposing VAT on private education and national planning policy. Meanwhile the SNP, Reform UK and the Greens remain bit-part players in any national economic debate.
As a result, it is worth remembering that whatever impact the budget statement may have on the UK’s economy and markets will soon be overshadowed by the outcome of next week’s US Presidential election. The economic distinction between the two candidates in Washington is arguably more one of sentiment rather than substance; but it is clear that a second Trump administration and its promise of tax cuts would likely act to turbo-charge entrepreneurial spirits, promote US economic interests at the expense of its trading partners but also result in globally prolonged higher rates of inflation and borrowing costs.
Written on 30 October 2024 by The Rt Hon Mark Field, former Member of Parliament (MP) for Cities of London and Westminster and Consultant at Buchler Phillips, an independent boutique firm with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.