ALEX BRUMMER: Fiscal blow to private investment in the budget

Rachel Reeves has at least one more big outing ahead of her budget debut on October 30.

Next week, the Chancellor must travel – barring last-minute setbacks in the Cabinet – to the G7 and International Monetary Fund (IMF) meetings in Washington.

The IMF’s support for a strict budget has already emerged from preliminary fiscal documents issued last week, which for some reason linked the two largest English-speaking nations, Britain and the United States, as needing to take corrective measures to reduce debt. and debt loads.

Americans have a much bigger debt problem than Britain, but it is much less of a concern for American policymakers because of the extreme privilege of issuing the world’s most important reserve currency. That means there is an insatiable appetite among surplus nations, particularly Japan and China, to own U.S. Treasury bonds that can be quickly converted into cash to meet emergencies.

Reeves and the Government have done a skillful, if wholly inadequate, job of laying the groundwork for a strict budget.

Almost every possible measure to raise revenues has been telegraphed, including some that fail to deliver on manifesto promises. VAT on public school fees is a tax that breaks the fence surrounding exemptions. The Economist magazine notes that this is the first such breach of the exemptions, estimated to be worth £100bn by the Institute for Fiscal Studies (IFS).

The proposed surcharge on employers’ National Insurance Contributions (NICs), or on employers’ pension payments, is a crude way of getting around the promise to leave workers’ taxes untouched. The reality is that it is a terrible cost for service companies, which represent more than 75 percent of the economy and are labor-intensive.

It will hit workers hard through job losses and higher consumer bills if companies decide to pass on the cost. What is missing from much of the anticipated budget rhetoric is any acknowledgment that the country is already overstretched as a result of Covid-19 and Ukraine.

It was Labour’s anger in opposition over the impact on household energy bills from the Russian invasion of Ukraine that led the Conservatives to pay the full amount of subsidies.

Former head of the Office for Budget Responsibility, Robert Chote, observed during the House of Commons hearings on the pandemic that under war conditions, such as Covid-19, accumulating debt and borrowing is acceptable. After the Second World War, it took decades to erase the legacy of debt, but that did not stop governments from launching the NHS or building record numbers of new homes.

After all, we are already taxed enough. The IFS notes that, at 37 percent of national income, tax revenues are at the highest level since the 1940s and continuing to rise. Expected revenue increases from the tax relief freeze will generate £35.7bn until 2028-29 alone, before new tariffs are imposed.

Reeves is trying to frame his proposed tax assault on drivers, wrestlers, gamblers, employers and well-off Britons as no different to what Tory chancellors have done in the past. His team has been quoted as saying that the 2024 budget follows the same mold as Norman Lamont and Ken Clarke after Britain’s expulsion from the Exchange Rate Mechanism (forerunner of the euro) in 1993 and George Osborne after the great financial crisis of 2008.

The reality is that Reeves’ predecessor, Jeremy Hunt, put in place the scaffolding to pay off the pandemic and Ukraine debt when in 2022 he raised the headline corporate tax rate to 25 percent from Osborne’s 19 percent and expanded the freezing of income, IHT and National. Insurance thresholds until 2028-29. He also began the arduous process of trying to set the welfare budget, with sickness benefits among those who increased the size of the government.

Reeves is plugging black holes he has helped create with generous public sector pay deals and money earmarked to strengthen government services. His budget will see the revival of some key investment projects, notably the Euston link for HS2 and plans to better connect London and Birmingham with Manchester.

The error in his message is that piling on tax increases in a recovering economy would crowd out, rather than attract, private investment. It will jeopardize entrepreneurship, entrepreneurship and growth.