30 December 2024,
Rt. Hon. Rachel Reeves,
HM Treasury,
1 Horse Guards Road
Westminster
London
SW1A 2HQ
Dear Ms Reeves,
During the recent election campaign, you said that you would make Britain the most attractive country to do business in and that economic growth was your priority.
Though many of us are not natural Labour supporters, the last government seemed to go out of its way to hamper business development, so we naively thought that you may have seen that things could be done better and were happy to give you the benefit of the doubt.
However, your recent Budget put paid to all of that and I and many others are still shellshocked by the slew of election promises that were so rapidly broken. The complete lack of intellectual coherence in policy is also very alarming. I find it particularly hard to understand what you were attempting to achieve in terms of long-term gain by these measures.
There would appear to be a complete misunderstanding of what makes entrepreneurs tick, and in fact basic human nature for that matter. That is in addition to a total misunderstanding of what a business actually is; who ultimately pays all the tax; and which part of the economy pays for the public services.
I can’t see from Your CV that you have ever tried to run a business let alone start one, so you will not understand why someone would risk their family’s wellbeing to start their own business. They do it to make money for themselves, but also to build capital for their family and control their own destiny. With over half of new businesses failing in the first three years, there is a high risk that those plans don’t turn out as well as expected however well planned. In most cases, even the best plans have to be changed along the way in order to stay in business. Initial working capital is often raised by investing savings or remortgaging the family home, so the risk has to be seen to be worthwhile.
Your changes to National Insurance, CGT and IHT dramatically reduce the potential reward. As humans we by instinct want to do the best for our children; we want to build something to pass on to them and your changes penalise that aspiration. You penalise us for employing people by substantially increasing the tax on jobs. You penalise us for continually reinvesting our profits in the future wellbeing of our businesses. What is the point of reinvesting when all we are doing is creating an ever-greater tax millstone that our heirs will have to deal with in the event of us dying within seven years of handing it on?
Perhaps you think it would be better to discourage the growing of family businesses; that we should save our heirs the hassle, and sell up to a buyer so you can harvest the CGT? What has not been widely mentioned is that CGT has to be paid by the estate of a deceased prior to payment of IHT, so a larger proportion of a business’s share capital will have to be sold to cover the tax than just that to cover the 20% IHT. This is an extremely short-term and destructive policy, as by destroying dynamic SMEs you are also destroying the innovative and dynamic part of the economy. Why do you seek to destroy rather than build?
A business is nothing more than a body corporate that sells goods or services in exchange for money. In doing so, it will only survive if the value of its sales exceeds its costs, and is only sustainable if its customers are prepared to buy from it. No business can survive unless it has customers. It is they who pay the wages; without them there is nothing. If our costs exceed what the customer is prepared to pay for our goods or services, we die. Crucially those costs include those levied by the government in the form of regulation and taxation. The increase in employer’s NI adds over £600.00 to the cost of each employee, whether full or part time, and has to be paid for by our customers.
It is the private sector that pays for the public sector. Any tax collected from employees of the public sector or public sector institutions, is simply a recycling of government expenditure. That taxed on the profit of the private, productive sector and its employees, provides the state’s income that allows public expenditure to not only be sustained, but also to grow from year to year as the private sector grows.
If the burden placed on the private sector becomes too big it starts to shrink, as businesses simply can’t survive the hostile environment and entrepreneurs go on strike. This lesson was learnt the hard way in the 1970s, but seems to have been completely forgotten. The higher taxes go, the lower the tax take.
I hoped that following the aims articulated and the promises made by you at the General Election you would get the economy growing, in order to generate the tax revenue required to fund your plans. Instead, we had the invention of a black hole which needed to filled, though considering you and your colleagues had also committed to spend considerably in excess of this amount, what was in truth, on total government expenditure of over £1 Trillion, a rounding error of less than 2% became something much larger. Having now put the cart before the horse in this way, the economy has potentially been thrown into a doom loop of at best stagnation and at worst recession.
This is not helped by the above inflation increase in the Minimum Wage which has already led to massive wage compression, as it has not been set by the market or matched by productivity growth. With a minimum wage salary now matching a basic graduate starting salary, what is the point in taking a degree when you can get a job without a debt to repay?
Ultimately, the only way that this situation is going to be reversed is through dramatically reducing the load on the private sector by cutting the public sector back hard. The public sector has been allowed to mushroom over the part decade and is now substantially bigger in every way than it was. Ironically, it is in many ways less productive than it has been for probably 15-20 years – a total disgrace. The longer this denouement is put off, the uglier it will be. Every single day one sees examples of government waste – one just has to look at the level of staffing in government departments, jobs that might be nice to have but are not actually bringing any real benefit to the country.
If you really do want to see economic growth, I would suggest you start 2025 by looking to encourage entrepreneurial aspiration. Encourage risk taking, and instead of trying to pile more load on the productive sector, cut the public sector cloth to match the resources available. You also need to relentlessly work on reducing the costs of doing business in the UK both through tax, regulation and energy, all at the moment increasing fast. This will gradually help us compete in what is an extremely competitive world market.
However, if your policy mistakes are not due to ignorance of what drives people to take risks, build businesses or do their own thing, and are instead based on a socialist hatred of private success and wealth, then there is little hope for Britain and even more of our talented young will, quite rightly, head overseas to build their futures.
(Photograph: © UK Parliament / Maria Unger, CC BY 3.0 <https://creativecommons.org/licenses/by/3.0>, via Wikimedia Commons)
Alastair MacMillan runs White House Products Ltd, a manufacturer, distributor and exporter of hydraulic components to over 100 countries. He is a supporter of the Jobs Foundation.
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Reeves and her socialist colleagues in cabinet practice what Robert Nozick once jokingly called “normative sociology – the study of causes as they ought to be”. Thus their disconnect from reality.
Like most cultists or ideologues the response of socialists to being contradicted by reality is to double down. Since it is not ignorance but envy and hate that informs Reeves, Phillipson et al, hate will not transform into humility. Rather, they will become even more destructive.
It was, and always will be, the same with any elected political party in this country – tinkering with details, seemingly entirely oblivious to the need for dramatic and sweeping actions. No one understands the UK tax system – abolish all taxes and impose a new single tax paid by all without exception. Expenditure would then need to be matched by this tax income. Abolish Local Government and instead let residents pay for what they need or want (refuse collection without restrictions would come top and the things that LAs now mess about with unwanted at the bottom). The list of radical changes required is endless. Of course people (especially those who currently pay nothing and those who manage to avoid paying anything at all) will complain about unfairness because a reconfiguration would greatly inconvenience them, and many, many others would find themselves out of work and with no skills to actually produce anything of use because all they have ever done is play at being office workers whilst being paid for by those who do produce things or offer real hands-on practical services.