Far from boosting growth, the Government’s economic plans are likely to do serious damage, making the nation’s finances much worse by the end of this decade. That is the conclusion from a study by the Growth Commission.
The think-tank calculates the overall effect will be to cut national output – or gross domestic product – by nearly 9 per cent by the end of the decade, assuming Labour remains in power and the policies are not reversed.
It would also result in a black hole in Government finances of more than £80 billion a year.
Reform: Angela Rayner, centre, and Louise Haigh have pushed for workers’ rights alongside union barons like RMT boss Mick Lynch
That’s partly because higher taxes make people and businesses change their habits, but also because tighter fiscal policies lead to slower growth.
The policies may result in increased revenues at first. But so called ‘static tax gains’ which assume people do not change their behaviour can soon evaporate as individuals and firms take action to avoid paying more. This can lead to a lower tax take over time.
This work has been done as part of a wider project, the Growth Commission’s Autumn 2024 Growth Budget, to be published on Tuesday.
Douglas McWilliams, a co-founder of the Growth Commission, says: ‘The three most economically damaging potential policies are bringing capital gains tax into line with income tax, the package of workers’ rights, and premature adoption of net-zero.’
The Government says growth is at the centre of its ambitions. Yet this independent analysis suggests its policies will have the reverse effect – in the long-run cutting tax revenues.
If it is even broadly right, this will be dreadful for us all. Here is the impact of the main measures the Government might take:
Capital gains tax
An increase in capital gains tax will cut economic activity. The Government has denied that the tax will be brought into line with income tax as initially suggested, which the Growth Commission predicted would lead to a 0.9 per cent fall in GDP by 2030.
But even a smaller rise would lead to a fall in savings, investment and entrepreneurial activity.
NI contributions
If the rate of employers’ national insurance contributions were to go up by two percentage points that would raise £16.2 billion a year. But we know from the reaction of businesses that firms are likely to hire fewer staff, cut jobs and rein in pay rises.
Not only would the tax take be much smaller as a result, but that the measure would reduce GDP by more than 1 per cent by 2030.
Workplace reform
The plan is to make it harder for employers to dismiss staff and give employees greater rights.
Labour is keen to placate the unions, which has brought it into conflict with some foreign investors it has been courting.
This tension was highlighted recently when Deputy Prime Minister Angela Rayner and Transport Secretary Louise Haigh heralded legislation to protect seafarers and attacked P&O Ferries, prompting parent DP World to threaten to pull a £1 billion investment.
The research assumes the worker rights will result in a dip in productivity in unionised parts of the economy, notably the public sector, and this will lead to a 1.3 per cent fall in GDP by the end of the decade and an immediate worsening of the Government’s financial position.
Tax-free pensions
Most pensioners can take out 25 per cent of their pension pot tax-free. In theory, were Reeves to stop this, it would raise £5.5 billion in tax.
But aside from making pensioners poorer, it would also reduce savings and investment, cutting GDP by nearly 1 per cent by 2030. The resulting cut in Government revenues would far outweigh any short-term increase in the tax take.
Inheritance Tax
One proposal is to remove business property relief from inheritance tax. At present, the relief covers business assets passed to survivors, including shares in firms listed on the AIM market and on agricultural land.
The Institute for Fiscal Studies calculated this would raise £3.4 billion a year. The research assumes this figure does not take into account the effect on growth, and says the 0.3 per cent drop in GDP by 2030 would lead to a fall in other tax receipts of £10.7 billion a year.
Business rates
The research estimated that were business rates to rise by 20 per cent, it would add £5.9 billion to the expected £29.5 billion tax take in this financial year.
But that does not take into account the impact on growth, particularly of retailers, pubs and restaurants. The hit to GDP would be at least 0.5 per cent by 2030, wiping out any gains.
Energy policy
The research looked at the effect of producing zero carbon electricity and banning sales of new fossil fuel vehicles by 2030 – although this date has been set back to 2035 – and ensuring rental properties meet new energy standards.
It estimates the present plans will cut growth by 0.6 per cent in the next financial year, and that its energy policies will be the biggest drag on economic growth for the rest of this decade, cutting growth by 2.8 per cent.
Until now, the UK has managed to become greener because old heavy industries, which use lots of power, have been supplanted by service industries. But in future Artificial Intelligence will lead to a huge surge in electricity consumption.
Non-dom status
Reeves has reportedly rolled back on plans to end the ‘non-dom’ regime, where non-domiciled foreigners resident in Britain can, for a limited time, pay tax on their UK earnings only rather on their worldwide assets.
Going ahead would have cost 0.5 per cent in GDP by 2030 and lost £5 billion a year in tax revenue, as high earners, including 50 to 80 top footballers, left the country.
Planning reform
A plus on the Government’s policies is easing up on planning. This could increase growth by up to 0.4 per cent in the next financial year, which is good, but not enough to offset the damage.
It estimates that, with other measures, while the Government would be £31 billion better off next year, by the end of the decade it would need to borrow an extra £83 billion a year to cover the cost.
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