YESTERDAY Laura Perrins outlined how our Prime Minister and Chancellor’s plans will screw the middle class. I think it is even worse than she says.
We are set for even fewer public services at an even higher cost – something which could be avoided by cutting failing departments, as I wrote in TCW last week.
The Home Office, for example, consumes £16billion a year for failing to protect our borders; for all its resources it can’t even keep the M25 clear of eco-maniacs or protect buildings from being criminally damaged or their employees terrorised. The Ministry of Defence spends £60billion on not defending the realm, and the NHS spends £200billion on mismanagement while seeking 17 per cent pay rises. It’s about time the public sector started serving the public rather than itself.
But most fundamental is that the Prime Minister’s and Chancellor’s tax plans will screw the businesses which drive the economy (and pay for the public sector) and be the death of the economy too.
It is already shrinking fast when we need it to grow. Cutting the public’s disposable income is not going to make that happen. To their credit, Truss and Kwarteng realised this but sadly for them and us they did a Boris and proposed unfunded tax cuts and deregulation to stimulate growth. The market, plus a host of commentators from the IMF to the German Chancellor and the usual suspects such as the Institute for Fiscal Studies (IFS) and the BBC, didn’t like it. We have to hope that does not mean that sensible tax cuts (and other actions) to stimulate growth would not be supported.
At the moment 60 per cent of employment and 50 per cent of GDP comes from small companies. These do not have access to the funds in the City, are typically owner-managed and often funded through a mortgage on the owner’s home. These businesses need support; raising corporation tax (CT)does the opposite. The whole engine of capitalism is the creation of wealth through delivering profit. While some of this should rightly be taxed, remember that the profit is the reward side of the risk/reward calculation of the founders. Tax the profit too much and investments become unattractive. For the SME founders, tax the profit too much and they lose their house. This isn’t taxing the rich, it’s biting the hand that feeds the economy. The PM and Chancellor were proposing to raise CT from 19 per cent to 25 per cent, although it appears they have reversed that decision.
Corporation tax raises about £60billion; call it £3billion for each 1 per cent. Dropping it to (say) 10 per cent would therefore cost £30billion. Spread the drop over three years and that’s £10billion cost in the first year according to standard Treasury thinking. The evidence is otherwise, as I wrote here, demonstrating that Ireland’s cutting of corporation tax had a massive impact on its growth. Why? Because companies moved their headquarters there. Remoaners are currently gloating that the market cap of the French Bourse now exceeds the London Stock Market. Corporation tax in France is 25 per cent. Don’t copy them, undercut them and watch firms relocate.
So where can the Chancellor find this extra £10billion to plug the ‘black hole’? The options are to cut some more or borrow – it’s likely that the markets would favour corporation tax cuts as that generates growth. But surely, in £1,000billion of spending, £10billion is chump change. Indeed there was £5billion of accounting adjustments last year. The government also spent £6billion on broadcasting and publishing (presumably Covid propaganda) and £14.5billion in economic R&D – which can’t have been that good or we wouldn’t be where we are.
The Conservatives (in name only) clearly need to show some financial discipline after the ‘have cake and eat it’ years. But they also need to remember that the electorate thought they were the party of small government and pro-business, and that is what their mandate is. When Jeremy Hunt sits down after delivering his Autumn Statement today, if what it shows is that the Tories are Labour wolves in sheep’s clothing, it will prove his party is worse than pointless and its voters will abandon it for Reform in even greater numbers.