“A nation trying to tax itself into prosperity is like a man standing in a bucket trying to lift himself up by the handle.” It’s a gag Winston Churchill used often – and it hasn’t worn with age.
Rachel Reeves, the Chancellor, shares neither Churchill’s humour nor his economic analysis. On Wednesday, in Labour’s first budget since 2010, she unleashed a massive expansion of the state – a roughly £70 billion increase in annual government spending over this Parliament, funded by a £40 billion per annum tax raid and £30 billion a year in extra borrowing.
Labour claimed ad nauseum this budget will promote growth – a word Reeves used 31 times during her speech. Yet, while the Tories left total tax revenues heading for a 70-year high of 37 per cent of GDP, Labour has gleefully pushed the tax burden to 39 per cent – the highest since records began.
How does much higher taxation encourage growth? The market reaction to the Chancellor’s statement shows I’m far from alone in believing it doesn’t.
Reeves handed out plenty of class-war goodies to her party’s hard-Left – her attack on private jets and “non-dom” financiers causing yelps of joy from Labour’s backbenches. Her disgraceful tax on parents striving to send their children to independent school sparked visceral roars of approval.
But Reeves really launched not so much a class war as a war on the private sector: on the businesses providing jobs for the 80 per cent of us who don’t work for the state. Labour just put a spanner in the works of the UK’s economic engine room – stymieing the very wealth creation that generates the tax revenues and prosperity upon which all else depends.
Labour’s 1.2 percentage point rise in employers’ National Insurance Contributions to 15pc will curtail hiring and will be borne overwhelmingly by employees via reduced pay rises. Lowering the NIC threshold from £9,100 to just £5,000 a year punishes the lowest-paid workers the most.
Inflation-busting rises in the minimum wage, a direct company cost, will quickly feed into higher prices, prolonging the cost-of-living crisis. The businesses that will suffer most are the small and medium-sized firms upon which UK growth depends.
Little wonder that the Office for Budget Responsibility has concluded: “Budget policies temporarily boost output in the near term but leave GDP largely unchanged in five years’ time”. For all her talk of “investing to grow”, Reeves is thwarting economic expansion – while, at the same time, driving the UK deeper into the hole.
The Government is now forecast to borrow an additional £142 billion over this Parliament to fund huge public sector pay rises and other Labour pet projects. That’s why, since Reeves’s statement, the 10-year gilt yield, what the Government pays to borrow, has risen sharply – up almost half a percentage point.
That will send debt service costs soaring, not just for the Government, but firms and households too.
Labour’s budget has been billed as politically canny. In reality, it’s economically incoherent and financially dangerous. Reeves needs to bury her ideology – and understand that high-tax, high-spend, fuelled by borrowing, is the route to economic chaos. But that’s about as likely as her hanging a picture of Churchill in No 11.