For the past quarter of a century, beginning roughly with Tony Blair’s election, the British economy has been undergoing a slow yet radical transformation that now looks set to end in catastrophe. Almost imperceptibly at first, the authorities began relying on cheap credit and an artificial housing boom to keep the economy “growing”; eventually, this turned into outright money-printing and near-zero interest rates. At the same time, the size of the welfare state increased massively, paid for by higher taxes, reduced spending on traditional government functions (such as defence or the courts), as well as the proceeds (via stamp duty) of the growth mirage concocted by the monetary expansion.
Britain’s late 20th century economic model, characterised by delayed gratification, hard graft and increasingly competitive capitalism, has given way to a semi-socialist, semi-rentier paradigm, extinguishing our entrepreneurial dynamism and killing productivity growth. For all of Jeremy Hunt’s valiant efforts at fixing some of its surface-level problems, this model has now almost completely run out of road. Exhausted by Covid, which accelerated Britain’s welfarisation and sent inflation surging, Russia’s barbaric invasion of Ukraine was the final straw. Pent up liquidity and the energy shock propelled inflation to 10 per cent, forcing central banks to jam on the interest rate breaks. Yet history shows that jacking up borrowing costs – even when, as now, it is necessary – always wreaks havoc in unpredictable ways. The emerging pattern is ominous: a series of containable financial implosions – LTIs in UK pensions, the collapse of FTX and other crypto-currency operators, the bankruptcy of Silicon Valley Bank – is now giving way to panic across the banking system. The shares of Credit Suisse are down substantially.
We need to face the facts: another financial crisis and recession is now likely. House, bond, commodity and stock prices are falling, and this time central banks no longer have the tools to reflate artificially. We are entering a period of radical uncertainty – one that will surely destroy Hunt’s fiscal forecasts and send the national debt surging – at the worst possible moment. Even before any looming financial bust, Britain’s “real” economy was in tatters, brought down by extortionate, incentive-sapping taxes. The top 13 per cent of the highest earning adults – the 11 per cent who now pay the 40p tax rate, and the 2 per cent hit by the 45p levy – are being treated as milch cows. Tax thresholds are being frozen until 2028 at a time of rampant inflation, and the additional rate band is being extended, even though no society has ever prospered by crippling its upper middle class. An extra 3.2 million people will start paying income tax by 2027-28 as their nominal income rises above the personal allowance. An extra 2.1 million workers will be dragged into the 40p rate, taking the total to 6.7 million, and an extra 350,000 will be forced to pay the 45p tax rate (or in many cases an even steeper rate), taking that total to 1.1? million. Taxes will hit a post-war high of 37.7 per cent of GDP in 2027-28, including the highest ratio of corporation tax receipts since it was introduced in 1965 (so much for the impact of Hunt’s counter-measures). Public spending will settle at 43.4 per cent of GDP, its highest sustained level since the 1970s. How will this be affordable if another financial crisis erupts?
Hunt’s response is to encourage more women with children, older people and those trapped on welfare to work, by bolstering their incentives to do so. But what about those of the rest of the country? Don’t they count? No wonder Hunt is relying on net migration of 245,000 a year to prop up growth. The strike that really matters is that of the private sector, which increasingly cannot be bothered to get out of bed. Many will make less effort, not bother with a promotion that leads to barely any extra post-tax pay, won’t take the risk of setting up a business or, for those with a sizeable nest egg, simply give up. For older workers, the reduced returns to working come with an ageist culture and the rise of fanatical, hyper-bureaucratic workplace wokery, which many rightly dislike. This isn’t to say that some of Hunt’s plans won’t help. I’m greatly encouraged by the reforms to welfare. The Chancellor’s partial deregulation of medicine approval is great, but why not apply the same principle to other sectors of the economy?
The introduction of close to “full expensing” of company spending on plant, IT and machinery – the fine print falls short of the headline – will cancel out half of Sunak’s corporation tax rise. It won’t, of course, undo the idiotic windfall tax which is killing energy investment. Full expensing is an excellent policy but it shouldn’t come at the cost of a higher headline rate. The social purpose of a business isn’t merely to invest. Most companies don’t require lots of capital; it isn’t “wrong” for them to make money. Hunt’s pension reforms are welcome and will help keep a few thousand doctors in work. But George Osborne slashed the annual tax-exempt pension contribution from £255,000 a year (when the pound was worth a lot more) to just £40,000 during his banker-bashing phase; the highest earners can currently save almost nothing. The rise to £60,000 barely covers a few years of inflation, and the highest earners will only be allowed to save £10,000 a year. Given this, abolishing the lifetime allowance, invented by Gordon Brown in 2006, while good news if it ever happens, will be largely symbolic.
The Chancellor’s childcare reforms represent the final step in a vast expansion of the welfare state, yet government-created pathologies in our economy and society are to blame for the crippling cost of childcare. An alternative liberal-conservative approach would be to deregulate the childcare industry and levy much lower taxes on parents through an additional, per child tax allowance (bolstered by a benefit for those on low-incomes), and allow families to organise themselves as they see fit. Hunt’s Budget was greeted by the FTSE 100’s worst day since the start of the pandemic. The reason? Britain’s big-state, debt-addled economic model is fundamentally broken, and a global crisis looms. No amount of tinkering, however well-intentioned, will be enough to protect us from a traumatic reckoning.