“Business Connect”
Addressing 250 top British business leaders last Monday (24 April) at the government’s first Business Connect event, Chancellor of the Exchequer Jeremy Hunt admitted that “the tax burden [in the UK] is too high.”
And yet he, together with the prime minister, raised the tax on profits of British businesses from 19 percent to 25 percent just last month, knowing that this will further discourage new foreign investment in the British economy, which has flatlined since the Brexit referendum of 2016. He is also the man who has frozen the thresholds for income tax and national-insurance contributions (NICs) at a time when inflation is still running at more than 10 percent.
Hunt said that he wanted to reduce taxes, but that that would only be possible as a result of economic growth – which at the moment is feeble, as it is across much of Europe. The UK’s total tax burden is about 37.7 percent of GDP – a post-WWII high. Moreover, the UK is perceived from abroad as a nation which has flip-flopped on fiscal policy. George Osborne, as David Cameron’s chancellor, brought corporation tax down at a time of financial stress; his successors have revered this policy. Theresa May, as far as we know, had no interest in business whatsoever. Her successor, Boris Johnson, had a famous catchphrase: “F**k business.”
No one speaks about the UK as a low-tax economy anymore – yet this was once our major competitive advantage relative to our prosperous neighbours such as France, Germany and the Nordic countries. And now foreign investors are faced with the prospect that a Labour government will likely come to power next year with a ‘red-green’ agenda that will probably mean more taxes for businesses and the long-suffering middle classes.
The dream of the Brexiteers was that the UK outside the EU would emerge as a freewheeling and dynamic hub of enterprise with light-touch regulation and a pro-business government. That now looks naïve. Regulation has, if anything, become more burdensome and the Tory government seems to be out of step with business much of the time. The Online Safety Bill, currently making its way through the House of Lords, would undermine end-to-end encryption of message platforms. WhatsApp (owned by Meta) has already said that it would not allow that to happen. Presumably, it would have to withdraw from the UK altogether. That would not be popular.
The prime minister told the gathering on Monday that the UK was “the best place to invest in the world.” Many would beg to differ. Brad Smith, president of Microsoft, told the BBC on Thursday (27 April) that “the English Channel has never seemed so wide…There’s a clear message here − the European Union is a more attractive place to start a business than the United Kingdom.”
Microsoft is furious that the Companies and Markets Authority (CMA) has blocked Microsoft’s $68.7bn takeover of the British gaming company Activision Blizzard. This deal is important for Microsoft because it seeks to bolster its position in the fast-growing, cloud gaming market. But what Brad Smith said will be heard by business leaders worldwide.
Losing Ground To Uncle Sam
Meanwhile, the US, under the presidency of the oldest leader in the nation’s history, and during a drawn-out geopolitical crisis combined with a global slowdown, is doing rather better than we are. While the US economy was five percent larger in Q4 2022 than in the last quarter before the pandemic – Q4 2019 – the UK economy was 0.6 percent smaller.
President Biden’s Inflation Reduction Act will pump $369bn into the US economy in the form of grants and subsidies, to ease the transition to the zero-carbon economy. And in the US the rate of corporation tax – thanks to Donald Trump – is just 21 percent. This has already prompted some businesses to redirect investment from the UK to the US. As I have suggested here previously, it is now doubtful that any major automotive player will build an EV-battery gigafactory in the UK – without which the future of our entire automotive industry is in doubt.
Unipart, the automotive-component manufacturer announced this week that it is considering moving some production to the US. Ineos Automotive – controlled by Sir Jim Ratcliffe – is to build its new-generation, all-electric Grenadier 4×4 in Graz, Austria. Ineos considered building its first-generation, diesel-powered Grenadier in Wales but instead chose to build it at a former Mercedes-Benz plant in Hambach, France.
Personal taxes in the US – although they vary from state to state – are lower than in the UK. According to the OECD, a British worker on the median income with two children faces an effective tax rate of 18.9 percent. Their American counterpart faces an effective tax rate of just one percent. Top UK earners pay a marginal income-tax rate of 45 percent on income over £125,140. The highest-paid earners in the US pay a top income-tax rate of 37 percent on income above $539,900.
And then there are inheritance taxes which are now even incurred by ordinary Brits. UK inheritance tax amounts to 40 percent on estates in excess of just £325,000 – which is little more than the value of the average house. In contrast, the Federal Estate Tax in the US applies only if the deceased person had assets over $12.92m.
Apart from a brief period in the Great Depression (1929-36) the average American has been richer than the average Brit for about 150 years. But in recent years, the differential has been widening since the US has recovered faster than the UK from all three cataclysms of the last 15 years – the financial crisis, the pandemic and the fuel-price shock triggered by Russia’s invasion of Ukraine.
That is partly because, unlike the UK, the US is self-sufficient in energy and much less reliant on imported foodstuffs. In fact, the US only imports about 15 percent of what its citizens eat; in the UK this is around 50 percent. This, plus its sheer size and the ease of doing business there, makes the US much more resilient to external shocks than the UK.
People move around the US, often over huge distances, to find work. In the UK the social-housing system (council housing) makes people reluctant to relocate lest they can’t find affordable housing. A more flexible labour market is reflected by faster-rising incomes. Between 2008 and 2021 income rose in the UK by seven percent. In the US the figure was nearly 20 percent. As a result, Americans are more optimistic about their economic future than we are.
Housing costs are also generally lower in the US than in the UK. It is not surprising then that many young British professionals are voting with their feet and moving to the US if they can get a job there.
For all that, inequality is more pronounced, indeed more evident, in the US than in the UK. Life expectancy is lower there and declining. Higher inequality loosely correlates with higher crime rates. Even my most patriotic American friends regard the UK as safer than the US – even though one often does not feel safe in parts of London and other big British cities these days. Homicide rates and gun-crime statistics put the US in a league of its own.
Failing Public Services
Before Brexit, the consensus was that although taxes are higher here than in the US, British citizens benefit from a range of public services, in particular universal health care, which the Americans have to pay for out of their own pockets. Also, people agreed that health care was probably somewhat better in France – and certainly pensions are more generous – but also recognised that the French pay more tax than their neighbours across the Channel. So, the UK was thought to be a kind of halfway house between Europe and the US. I’m not sure that that model is credible anymore.
Even its most zealous advocates admit that the UK’s ‘sainted’ National Health Service is in crisis just as British tax rates converge with those in Europe. With about seven million people on the NHS waiting list, more British people are choosing to pay for health care privately, to get treated sooner. In contrast, most American professional people have their medical insurance paid for by their employer. In the UK, if an employee is covered by medical insurance provided by his employer, that is classified as a taxable benefit.
The NHS is definitely not “the envy of the world” as we were once assured. An experienced consultant cardiac surgeon, Jullien Gaer, who has worked in France and Australia and now the UK, wrote a revealing piece in the Daily Telegraph recently. He points out that the UK spends around 12 percent of GDP on health care – more than the OECD average – and yet produces worse outcomes. He believes that the main reason for this is the regulatory burden on NHS staff. Even clinicians who never work with children or vulnerable adults are required to undertake lengthy ‘safeguarding’ training and to attend endless meetings on the issue. In the US, hospitals organise themselves so as to maximise the time that surgeons spend in the operating theatre. Not in the NHS.
A recently published study from the OECD comparing 25 member nations shows that the obsession to “protect the NHS” during the coronavirus pandemic resulted in the cancellation of more cancer treatment in the UK than anywhere else. For example, prostate-cancer operations fell by 40 percent in 2020 relative to the previous year. Mastectomies fell by 15.2 percent.
Even a four-week delay in surgery for a cancer patient is estimated to greatly increase the risk of mortality. Delays in treatment during the pandemic are the main reason why excess deaths are still running well above historically “normal” levels. Some cancer patients in the UK are still waiting up to two years for chemotherapy. That is lamentable.
Family Values?
The UK tax system is at variance with the well-being of the family. So thinks Philip Booth, who is professor of finance, public policy and ethics at St. Mary’s University, Twickenham.
Under the tax regime instigated in the 1980s by the late, great Nigel Lawson (1932-2023), households with identical incomes pay differing tax bills depending on the split of earnings between the two partners. This means that, in the 2021-22 tax year, a household where one partner earnt £30,000 and the other partner stayed at home (for whatever reason) would have paid about £3,500 more in income tax and NICs than if the two partners were both earning £15,000.
That is because the personal allowance (the amount above which income tax is applied) is granted individually and not on a family basis. True, the Cameron-Osborne government allowed the unused part of one partner’s personal allowance to be transferable to the other partner, but the anomaly persists. The inequity is exacerbated if one partner pays income tax at the higher rate (on earnings over £50,000).
Under the working-tax-credit schemes first introduced by Gordon Brown in the first term of the Blair government, many families are simultaneously paying income tax and NICs while receiving benefits. Such a system is complex and expensive to administer. The combination of expensive housing and a punitive family-tax system deters couples from starting families. Our tax system discriminates against parents who stay at home – even though child-care costs are amongst the highest in the OECD.
Yet Miriam Cates MP argues that it is wrong to presume that the cost of childcare is the primary factor which prevents women from returning to work. She says many mothers would prefer to work fewer hours and to look after their pre-school children at home. If childcare costs could be deducted from joint taxable income, that would reduce the overall need for childcare.
The childcare sector, as with care for the elderly, generates jobs that are overwhelmingly poorly paid and where the workers are largely female. The chancellor’s recent concession of 30 hours a week of free childcare for infants from nine months to two years’ old will cost more than the additional tax revenues generated from their mothers returning to work. Economically speaking, that does not make sense. The assumption behind state-funded childcare is that mothers are more useful to society in employment than nurturing children. That is questionable.
Devolution Disaster
Many people on both the right and the left of UK politics argue that a major obstacle to productivity growth is that decision-making in the country is overcentralised. They advocate devolution within England, with more elected mayors, for example – which veteran Tory politician Lord Heseltine has been making the case for since the 1980s − and more regional development bodies with powers over planning.
On the other hand, the Blair government (1997-2007) gave a considerable amount of autonomy to Scotland and Wales in the so-called devolution settlement. Yet those two British nations have experienced even worse economic performance than the UK as a whole over the last 20 years, despite having had their own governments. And their public services have deteriorated more rapidly.
In Scotland, a country with a population of around 5.5 million, about 1,330 people died of drug-addiction-related deaths last year compared with 19 in Slovakia, which has an equivalent population. And who did the SNP government blame for this appalling statistic? Why, Margaret Thatcher, of course – even though the SNP has run Scotland since 2007 (and Thatcher died in 2013).
What about public services? If the beloved NHS is on its knees in England, it is out for the count in Scotland. According to the BMA, Scotland is desperately short of doctors, nurses and midwives. Over 600,000 people in Scotland – just under 20 percent of the population – are awaiting treatment, compared to just 300,000 when Nicola Sturgeon became first minister in 2014.
Scotland is rightly proud of its tradition of educational excellence. The Scottish Enlightenment, based in Edinburgh in the late 18th century, changed the world. And yet educational attainments in Scotland have been in freefall of late, according to the OECD’s metrics.
Moreover, Scotland’s public finances are in a much worse state than those of the UK overall, with a fiscal deficit of over 11 percent of GDP, compared to one of around three percent this year for the UK as a whole. Kate Forbes MSP, when Scottish finance minister, raised income-tax levels in Scotland to above those in England. And for every £100 the Westminster government spends per citizen in England, it spends £126 in Scotland. And yet none of the contenders in the recent SNP leadership election even talked about Scotland’s economy, let alone its tax regime. Institutional investors would need to sink a few drams before buying the bonds of an independent Scotland.
In Wales, Mark Drakeford’s four years as Labour first minister have turned a proud industrial country into a laboratory for half-baked, progressive ideas. A four-day working week? A universal basic income? A universal 20 mph speed limit? Punitive taxes for second-home owners? Welsh-language-only employment? Universal closure of businesses during pandemics? Tampons in male lavatories? Drakeford would dearly wish to raise income-tax rates to higher levels than in England but does not have the power to do so.
Yay! Let’s all go and live in Wales! Except that, if you are English, you will be blamed for the sorry state of the Welsh economy. After all, Wales remains the poorest nation of the UK – and is likely to remain so.
Devolution, as Blair saw it, was supposed to make the UK more dynamic. But because of the tribal politics that it has spawned in nations which were at the forefront of the industrial revolution in the 19th century it has become another drag on UK growth.
Poison Pill
Huw Pill, chief economist at the Bank of England, said on Tuesday that people “must accept” the fact that we are poorer − and get on with it. Striking for higher wages will only entrench inflation further.
He has a point. The terms of trade have turned against us: global fuel and food prices have spiked, and there is not much we can do about that, given our lack of resilience to external shocks.
These price hikes are admittedly exacerbated by additional ‘frictions’ associated with trading with Europe, post-Brexit. I’ll consider soon whether by joining the Trans-Pacific Partnership (or whatever it is officially called) we can ever mitigate the economic impact of trade lost with Europe. Further, the labour force contracted during the pandemic, with inflationary consequences. Public finances, which never recovered from the financial crisis of 2008-09, were severely damaged, first by the furlough scheme and then by various iterations of energy-price-subsidy schemes.
The Daily Mail, amongst others, was quick to point out that it is rich for a public official on a salary of £190,000 who lives in a house worth £1.5m to lecture people who have been driven to use food banks to feed their families.
But Pill told it how it is. A national reversal of fortune is always painful. The novels of Charles Dickens are full of examples of reversals of fortune – mostly negative ones such as the genteel Dorrit family landing in debtors’ prison (Little Dorrit).
The left thinks that the further impoverishment of the least well off should always be redressed by higher taxation of “the rich” (which usually turns out to be the middle classes). But all such policies result in the degradation of the economy’s capacity to generate new wealth.
A government cannot be reelected in a modern democracy on a policy of ‘let’s tighten our belts’ – even one which is committed to making us slimmer by changing our eating habits. The next election − which I think will most likely take place in October next year and is therefore 18 months away − will be a contest between an incumbent Conservative party without any agenda for structural reform, and a Labour party desperate to mask the extremist tendencies of many of its members and supporters. Having abandoned the working class that Labour used to represent, the party wants to smash the constitution and to give the devolved governments even more powers that they will wield against Westminster.
I shall prognosticate the outcome of that election soon. But, whoever wins will preside over a state machine which is dominated by a civil service − including the OBR and central-banking establishment − which is wedded to the prevailing progressive ideology. Part of that ideological groupthink – a form of creeping social democracy with sympathies towards Extinction Rebellion and other forms of green extremism − is that the distribution of wealth should be prioritised above the creation of wealth. That was the mindset that prevailed in the UK from 1945 until Thatcher came to power in 1979.
These people have always believed that a little bit of fiscal stimulus here and lot of monetary stimulus there will keep the economy on course. But they are ignorant about entrepreneurship and the constant march of technology which sets our national competitiveness in unrelenting flux.
There is currently little prospect that either major party will offer a radical solution to the UK’s current state of stagnation at the next election. To their credit, Liz Truss and Kwasi Kwarteng were ahead of their time. But, unlike Lawson in the 1980s, they did not do the spadework before launching their reforms. Remember that Lawson cut the upper rate of income tax from 60 to 40 percent in 1988 – nine years into the Thatcher government. Enduring revolutions require careful preparation.
A good starting point for the next revolution would be to remodel the cranky British tax regime from scratch. And to start with anticipated revenue, then budget for expenditure accordingly, rather than the other way round.
Will that happen? Don’t hold your breath.