If you’re reading this, then I’m delighted that I survived our charity sky dive to raise money for St Basils and Emmaus, two great charities supporting homeless people to find and keep a home, grow their confidence and increase their opportunities! Unfortunately, I survived because it was cancelled due to cloud conditions and so there will be another opportunity to throw myself out of a plane in the coming months.
As I contemplated the prospect of rushing towards the ground at a terminal velocity of 120mph, my thoughts naturally turned to how the UK economy could soar like an eagle rather than constantly bumping along the tarmac, mired in sclerotic growth and falling inexorably behind so many of our international peers. I then pondered the investment philosophy of our new government, and the impact last week’s Budget may have on our national economic prospects.
I’m confident that none of you need another review of the Budget but it is worth considering the overall impact based on the winners and losers. By far the biggest tax increase was to employers’ National Insurance Contributions (NICs). When combined with the 4% reduction in the rate paid by employees since January, the fiscal burden has shifted dramatically from employees to employers. Whether that is good or bad probably depends on whether you meet Sir Keir Starmer’s definition of a working person, but an equally significant and, in my view, much more damaging change is between the sectors affected.
Employees’ NICs are paid by all employees regardless of where they work. Notionally, employers’ NICs are paid by all employers, regardless of whether they are in the public or private sector except, of course, that for the public sector, NICs are effectively passed simply from the left pocket to the right pocket. So, what we had last week was a £25bn tax grab purely from private sector employers, which those employers will need to fund. They can fund that by cutting employee numbers in the short term or by keeping down wages in the medium term so that the impact is lessened over time. Neither of these measures are likely to create a workers’ paradise and the Office of Budget Responsibility (OBR)’s report that accompanied the Budget makes clear that private consumption will be reduced, which will weigh on GDP growth.
The alternative way for employers to afford additional NICs is, of course, to reduce investment. The government may not appreciate it, but private sector investment is funded entirely from profits and if profits are reduced then investment will be reduced. Indeed, the OBR’s report also makes clear that reductions in private sector investment will also reduce GDP growth over the next five years. This is partly because public sector investment will crowd out private investment (a builder can only work on one building at a time for instance) but also because there will be less money available to invest.
Of course, this country badly needs more investment, so investment from any source is surely welcome but I worry about how effective public investment is in raising living standards. One only needs to consider the HS2 fiasco or the spiralling costs of Hinckley Point to appreciate that governments of all stripes are not that great at making investments so should we really be favouring public over private investment?
This brings me to my final point, which is what could a government that promised to be the most pro-growth government in history have done differently and how could it have catalysed private sector investment, which remains consistently lower than in other advanced economies?
The first measure I would have liked to have seen would have been support for training. Many companies partially fund training through the apprenticeship levy but that doesn’t address the cost of employing the trainee. For capital light, knowledge intensive businesses like Claritas, R&D tax relief or capital allowances have little impact but an enhanced tax relief for providing high quality training which would make an individual more economically productive for life would incentivise the provision of high quality training and generate benefits for decades.
I would take a similar approach with new technologies. Again, UK Plc is not generally quick to adopt new technology, partly because we have become over reliant on cheap labour. A pro-growth government would surely incentivise technological advancement through grants or enhanced tax relief, particularly to cover the initial phase of adoption when costs can exceed outputs.
Lastly, I wonder whether we could return to a Victorian model of infrastructure investment. The railways were not built by civil servants and parliamentary committees but by entrepreneurs spotting an opportunity to provide a service and so make a profit. They controlled costs and built quickly because they wanted a return on their investment. Their focus was their customers and, thereby, their shareholders rather than constituents and vested interests. A truly pro-growth government would facilitate such investment by keeping out of their way as far as possible, allowing infrastructure to be built, services to be provided, profits to be made and taxes to be paid. I’m not arguing here for the return of PFI contracts whereby the public sector outsourced operational activity but retained risk, often at extortionate cost, but a different approach to encouraging risk taking.
As I return to that skydive, I know we can do better as a country, but I strongly believe that the government needs to trust and work with the private sector far more than it has shown to date. Finally, if you’d like to support St Basils or Emmaus with their work in giving hope to the homeless when the dive is rearranged, you can do so here:
