“A country which tries to tax itself into prosperity is like a man standing in a bucket and endeavouring to lift himself up by the handle.” That was according to Sir Winston Churchill in a speech to industrialists at Manchester’s giant Free Trade Hall in February 1904. Sir Winston was clear - you cannot expect to create wealth by depriving people of their hard-earned money and giving them a fraction of it back.
Fast-forward some 120 years and successive governments have taken Churchill’s insights and done the complete opposite. Despite Jeremy Hunt’s National Insurance cut at the Autumn Statement, Britain is on course by the end of the decade to record the highest tax-to-GDP ratio than at any time since the Second World War. The Office for Budget Responsibility predicts the nation’s tax bill will rise to close to an eye-watering 40 per cent of GDP by 2028.
This is no way to run a country battling to overcome anaemic growth and a chronic lack of business investment. As a manufacturer, I am proud to make things here in the UK and export them around the world. Very proud, in fact. British-made products are revered across the globe. But HMRC’s alphabet soup of punishing taxation and endless red tape doesn’t exactly get the juices going in the same way. Unsurprisingly the UK’s tax-and-spend model is not one our international competitors are rushing to emulate.
My colleagues in manufacturing agree. A survey by Make UK earlier this year revealed close to half of business leaders believe our tax and regulation system is unfavourable to business. And more than a quarter said it was worse than that of China and other major competitors. Indeed, only eight per cent of the 150 manufacturers surveyed said the tax and regulation system had no impact on investment decisions.
When Britain’s makers foot larger tax bills than their counterparts abroad, they think twice about making bold investment decisions. They have less money to spend on high-tech automation. They have less money to spend on hiring the next generation of engineers. And the prize for risking it all with potentially game-changing innovation is severely limited. And so Britain remains chronically unproductive and chronically over-taxed.
Both historical and contemporary examples show the miraculous things that happen when government gets out of the way and let businesses create wealth. In the 1980s, Margaret Thatcher slashed corporation tax by some 17 per cent over the course of her Premiership. Britain then underwent a miraculous transition from the ‘sick man of Europe’ to having one of the most dynamic business environments of any major economy.
In the 1990s Ireland slashed business taxes dramatically. Irish businesses attracted unprecedented foreign direct investment. And as a result, Irish people went from having living standards similar to people in Greece to today having the second highest GDP per capita of any country on Earth. While earlier this year Germany agreed a four-year 32 billion euro tax cut in a bid to further stimulate its highly-productive, investment-driven economy.
Opponents of a tax-cutting agenda tend to point to the disastrous 2022 Mini-Budget that was unleashed on the markets by the then Chancellor Kwasi Kwarteng. Kwarteng’s principle was correct but his practical delivery of the measures was catastrophic in that he seemed to do zero work laying the groundwork for the announcement amongst the markets. The fact that Britain was experiencing particularly high inflation at the time made it too a difficult environment in which to deliver a large tax cutting stimulus.
But Britain’s inflation is now below the 60-year average (5.2 per cent) and the time is right is to do something bold. It’s high-time Britain dispensed with the failed tax-and-spend model that has done us such harm for decades. We cannot begin to tackle long-term challenges around productivity and limp growth without an ambitious programme of tax cuts. The 2024 General Election provides a profound opportunity to re-set our economy for the better. But I won’t hold my breath.
David Millar, managing director of Heap & Partners.
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