Danger of a hair shirt Budget

TWO enormous challenges lie in wait for Jeremy Hunt and rishi sunak in the Budget this week. the first – the one everyone is talking about – is restoring credibility to the public finances. the second, and even more important challenge, was described by sunak in his Mais lecture earlier this year: to ignite growth.

liz truss and Kwasi Kwarteng had grasped that essential point but based their thinking on the flimsy foundation that it could be achieved solely through tax cuts, and unfunded ones at that. Hunt and his neighbour should not fall into the trap of swinging too far in the opposite direction.

In the zeal to restore order after the truss debacle, they must be careful not to quash the incentive to achieve. the suggestion bandied about of a return to labour’s 50pc rate for people earning more than £150,000 would do precisely that. so would lowering the threshold at which people start paying the top rate of tax to £125,000. It would be a big political gesture but just as pointless as truss’s attempt to axe the 45p rate – and deeply anti-aspirational.

the impact would not be confined to the very highly paid: the middle class are having their pockets picked by means of a stealth tax. freezing allowances and thresholds – already on ice until 2025/26 – for a further two years looks almost certain and is a disincentive to middle-earners to chase pay rises and promotions.

‘fiscal drag’, according to the Centre for economics and Business research, will fleece taxpayers to the tune of £52bn over the next five years.

even the Institute for fiscal studies, which is not exactly right wing, is critical of this tax-raising technique because it is opaque and unpredictable. It is also probably unavoidable, more’s the pity.

so what might be done, within the constraints?

HUntand sunak need to boost investment, skills and innovation. Business investment has been low in the UK since the referendum. the rise in corporation taxes is not helpful, and while it seems unlikely there will be another U-turn, Hunt could still provide incentives for investment.

at the same time, overseas predators with a keen nose for cheap assets have been allowed to build large stakes in of our largest companies including the royal Mail, Bt and Vodafone.

Ministers would boost national prosperity by shielding our assets from foreign raiders. this would cost nothing: they just need to use their new powers under the national security and Investment act in order to keep r&D and high value jobs in the UK.

labour and skills shortages are holding back growth. a major exercise is needed to re-skill and re-motivate the workforce. tax breaks for training would be a start.

economic inactivity is a scourge, with hundreds of thousands of people opting for early retirement, in many cases when they are at the peak of their professional powers and just the sort of people needed to help create growth. Hunt should think hard about whether punitive tax rates and pensions rules may be leading people to conclude it isn’t worthwhile working.

He and sunak are right to think that growth cannot be achieved by unfunded tax cuts alone or by higher public spending.

But they need to take care not to overdo the hair shirt. One of rishi’s favourite economists, adam smith, argued that growth is driven by the ambition, which pretty much all of us share, to improve our own condition and that of those we love. taxing aspiration is a tax on human nature.