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If the economy continues to outperform expectations, Chancellor Rachel Reeves may not have to raise taxes
If Britain continues its strong performance, there may be no need for the Chancellor of the Exchequer to raise taxes at all, or at least not by much.
That’s one of the most contrarian views in a new survey showing the UK private sector reported its strongest growth in four months in August.
The latest evidence that Britain is growing much faster than expected comes from the S&P global purchasing managers’ index (PMI) for August, which showed business activity was higher at 53.4, well above forecasts of 52.9.
Output and employment increased in both the manufacturing and service sectors.
This positive news comes shortly after figures from the Office for National Statistics (ONS) showed the UK grew by 0.6% in the second quarter of this year, and forecast a 0.7% increase for the year.
However, most economists believe that the ONS and indeed the Bank of England are underestimating the economy’s performance by a wide margin.
The news welcomed the pound, which rose against the dollar for a sixth day to hover around $1.31 despite lower interest rates expected after companies reported costs were cooling to levels not seen since 2021.
We may even learn more today about when interest rates will come back down when Andrew Bailey, the Bank’s governor, speaks at the Jackson Hole symposium in Wyoming.
What is certain is that these latest figures do not fit with Labour’s absurd narrative that it has inherited the worst economic circumstances since the Second World War.
The supposedly lethal legacy left by the Tories is one of the reasons given by Chancellor Rachel Reeves to justify why taxes will have to rise in the October budget.
But if the economy continues to grow at this rate, is it necessary? There are several reasons for this. If interest rates fall again, which they will, the government will pay less interest on its debt, since government bond yields are much lower.
Secondly, higher growth means higher tax revenues: a 1% increase in GDP means an extra £10bn in taxes.
Third, if more people are working (as the latest PMI survey shows), that should translate into lower welfare spending. Simple math.
Instead of badmouthing the country, Reeves should be celebrating accelerated growth. Raising taxes (already too high) on inheritances and capital gains will kill that growth by depressing new investment.
Punch Taverns founder and serial entrepreneur Hugh Osmond summed it up perfectly when he tweeted yesterday that if Labour increases capital gains and makes it harder to hire people, then investors like him will risk less of their capital in the UK and look elsewhere.
This means less tax revenue, fewer jobs and less growth. Simple math.
Energy madness
And that’s exactly what’s happening in the country’s energy sector now that Reeves is raising the energy profits tax.
As trade organisation Offshore Energies UK warned in its letter to the Treasury, Labour’s plans to increase the tax to 38%, taking the main tax rate on oil and gas activities to 78%, will destroy the industry.
In addition to the tax increase, there are also plans to cut investment and capital allowances.
Ironically, these increases will not only affect the supposedly “dirty” oil and gas companies, but also those working in wind energy, hydrogen and carbon capture.
Thousands of jobs will be lost, investment in future technologies will be reduced and energy prices will skyrocket.
Companies such as Ithaca, Serica, Harbour and Enquest have already cut back on investment.
This is the most ridiculous strategy: a Robin Hood in reverse.
The poor will pay for the rich as energy bills rise due to increased imports. Even the unions are against this policy.
They know we will need fossil fuels for decades until serious alternatives appear (small modular nuclear reactors and hydrogen). The winter blackouts will show them how absurd this is.
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