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A Land of Opportunity? The Challenge for the UK and its Chancellor

A Land of Opportunity? The Challenge for the UK and its Chancellor

Inflation may be on the decline, but not so Britain’s high tax, high public spending, high debt economy. Anthony Coombs considers the tax burden on entrepreneurs, its impact on economic success, and proposes how to lighten it for investment and  growth.

Far from being the land of opportunity, Britain’s economy is now sclerotic and burdened by over-taxation, over-regulation, and by a culture that resents, rather than. encourages success. It is also stifled by too high levels of public spending and debt to GDP.  As a result, average annual growth over the past 10 years of Conservative government has averaged a feeble half of one per cent. That compares with just under 3% per annum under John Major’s and most of Tony Blair’s premierships.

The upshot is that standards of living for Britons have stagnated, and real incomes fallen – some estimate by 7% over the past two years. The enterprise and risk culture in Britain is being strangled by record post-war levels of taxation, both personal and corporate. Yet, even now we see more dynamic economies, especially states in the USA, are experimenting with lower taxes to lure the talent and risk takers who drive economic growth.

By contrast, Britain is turning its back on the entrepreneurs and risk takers who brought so much to Britain’s economy and still do in some fields. At the same time, it is losing those it has. Between 2017 and 2022 it is estimated the 12,500 millionaires abandoned Britain for lower tax jurisdictions, with 3,200 people last year alone, it amounts to the highest drain of talent from anywhere in the world outside India and China. If these trends continue, Britain is condemned, according to Kwasi Kwarteng, the former chancellor, to, at best, growth of just 1.6% per annum for the next two decades. There is the added problem that some businesses depend on the low-skill labour market, often from overseas relying on welfare payments to top up low wages, instead of investing in high-skill, highly trained and high-productivity jobs.

Our own Stock Exchange is already suffering. According to recent research by broker Peel Hunt, listing numbers this year were the lowest for a decade. Over the past five years, no less than 30% of companies in the Small Cap index have disappeared, and values in this haven for entrepreneurial growth have fallen by no less than 50% in the same period. Indeed, last year more British companies choose to float in the USA than on their own home stock exchange.

Breaking the cycle of high, taxation, low growth, and unsustainable government borrowing and spending- requires a fundamental change in national mindset. It means recognising that the risks involved in building businesses and the well-paid jobs they create for everyone must be related to reward. Incentive is essential. Without it, entrepreneurs will either stay at home or, as we are seeing now, up sticks and move abroad. Cutting the cost of government and allowing taxpayers to keep more of the earnings is not only morally right but fuels incentive and economic growth.

That was recognised by Nigel Lawson and Geoffrey Howe, the two chancellors of the Thatcher government, which laid the foundations for the growth of the 1990s and the early millennium, and ended the image of Britain as the ‘Sick man of Europe’. At the end of Thatcher’s term of office, the tax burden as a proportion of GDP had fallen to just 30.5% in 1990. Shamefully, it is now 40%.

Even worse, not only is the tax burden higher than ever, but it weighs more heavily than ever before on the highest earners, the business builders and those who can take their talents, capital and tax contributions elsewhere. Thus, in the year 2000 50% of income tax receipts were paid by the highest 10% of earners. Now the figure is 60%. The most mobile 1 % of earners now contribute no less than 30% of income tax revenues, against just 24% twenty years ago. They subsidise half of the British population who contribute just 9.5% of income tax revenue.

Lawson and Howe recognised the fallacy analysed by the US economist, Arthur Laffer, whose Laffer Curve’ shows that if tax rates are increased above a certain level, then tax revenues decrease. This was because such regimes slowly destroyed growth incentives and the productivity improvements they bring about. That fundamental insight has been ignored on all sides of the political spectrum in the UK over the past twenty years. Indeed, such ignorance appears to have been hardwired into the Treasury’s economic modelling. House of Commons research indicates that the Treasury “only considers the direct impact of a measure on the tax base to which it is being applied” and continues to ignore the “effects on wider economic factors [which] are excluded”. Indeed, that tax can act a disincentive for the economy is too often ignored.

How should, in principle, this burden be lightened and a dynamic economy restored.

  • First, reduce Corporation tax by 1% with a clear timetable for reaching 20%.
  • Second, lower CGT for retail investors on gains up to an agreed annual amount on Stock Exchange investments, thus improving both liquidity and value.
  • Third, abolish the tapering of the personal allowance which cause the iniquitous 60% tax rate for those earning between £100,000 and £120,000 pa.
  • Fourth, publish a clear plan to restore the real value of the top tax threshold, which now captures 6.1m people at the top rate, nearly four times higher than in 1992. By 2027/28 this dishonest fiscal drag will otherwise catch 7.8m people, including one in four teachers!

Such reforms can avoid the mistakes made by the Truss government through adequate preparation and respecting the fiscal balance between lower public spending and debt and lower taxes. They would be made in consultation with the OBR, despite its with less than consistent record of economic forecasting.

Morally, these reforms would recognise the high earning people who have already made a disproportionate contribution to paying for the government services they consume. Practically, this would encourage businesses to expand profitably. And, strategically, this would establish the UK as a magnet for global investment and talent.

Anthony Coombs

Anthony Coombs has been Chairman of S&U plc since 2008. Between 1987 and 1997 he served as Conservative Member of Parliament for Wyre Forest.

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