Up next in 10
Rachel Reeves isn't going to introduce a wealth tax, but she will tax the wealthy.
She won't introduce austerity, but she will get spending 'under control'.
Confused? We don't blame you.
In this instalment of Week in Business, City AM editor-in-chief unpacks the strange contradictions in the government's economic plans.
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Produced by: Christian May, Scarlett Wild, Martin Kimber
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0:00
Rachel Reeves isn't going to introduce a
0:02
wealth tax, but she is going to tax the
0:04
wealthy. She isn't going to impose
0:06
austerity, but she is going to get
0:08
spending under control. Confused?
0:10
Welcome to the Week in Business with me,
0:12
Christian May.
0:17
Speculation over the contents of next
0:19
month's budget has reached fever pitch,
0:21
and it's only going to ramp up from
0:23
here. This is not idle curiosity. With
0:26
businesses still adapting to the
0:28
confidence sapping and job smothering
0:30
fallout from last year's budget, there
0:32
is now a genuine fear that what remains
0:34
of our economic resilience could be
0:36
crushed by the government's need to fill
0:37
an almighty black hole in the public
0:40
finances. Situation is serious. The
0:43
latest economic data out today confirms
0:45
that the UK economy is just 0.1% larger
0:49
now than it was in March. This is a
0:51
lamentable state of affairs that ought
0:53
to be met with humility and urgency by
0:56
the government. But that's not where we
0:57
are. A new report out today by
0:59
economists at Barclays and the Institute
1:02
for Fiscal Studies points out that while
1:04
Rachel Reeves is busy blaming Brexit,
1:06
List Trust and Austerity for today's
1:08
mess. The situation is in fact largely
1:10
of her own making. Yesterday, Reeves
1:13
conceded for the first time that tax
1:14
rises are on the cards, making her look
1:17
like the last person to realize this.
1:19
She told Sky News, "We're looking at tax
1:21
and spending." While a Downing Street
1:23
spokesperson refused to rule out
1:25
increasing income tax or VAT, hikes to
1:27
either of which would breach Labour's
1:29
manifesto. The Chancellor also confirmed
1:31
that taxes on the wealthy will be part
1:33
of the story. And she struck an
1:36
alarmingly bullish tone on this point,
1:38
claiming that when she abolished nondoms
1:40
and hiked tax on private equity and
1:42
private school fees, there were lots of
1:44
bleeting and scaremongering stories, but
1:46
that actually it's turned out fine. and
1:48
she's basically free to do it all again.
1:51
To me, this sounded genuinely dangerous.
1:54
People are leaving this country. People
1:56
have left and not just the non-doms, but
1:58
increasingly just high earners who just
2:00
want to feel like their work pays off.
2:03
Private equity hasn't abandoned the UK.
2:05
She's right. But a lot of its highest
2:06
earners have. And by the way, the
2:08
chancellor introduced a pretty modest
2:10
tax change on the sector specifically
2:11
because she understood that going any
2:13
harder would have damaged the industry.
2:15
As for private school fees, the sector
2:17
says 25,000 students have moved from the
2:20
private to the state sector as a result,
2:22
increasing the burden on state
2:24
classrooms. Now, the chancellor looks at
2:26
all this and thinks at best I got away
2:28
with it and at worst I can ramp it up
2:30
some more. She can say with some
2:32
sincerity that she isn't going to roll
2:34
out a dedicated wealth tax, but in the
2:36
same breath she can tell tax hungry
2:38
labor MPs that there are plenty of taxes
2:40
that as they see it fall on the wealthy
2:42
and she can increase them. capital gains
2:44
tax, dividend tax, employment taxes on
2:47
partnerships, pensions, and property
2:49
taxes. And it's now accepted that the
2:51
tax burden will simply increase over the
2:54
course of this parliament. Yesterday,
2:55
the International Monetary Fund said
2:57
that taxes in the UK will rise at the
2:59
fastest pace of all G7 economies.
3:02
Government revenues, largely from taxes,
3:04
will account for 40.6% of GDP by 2029,
3:08
up from about 38% now, or from when
3:11
Labour came to power. Now this focus on
3:13
tax rises is understandable and it's
3:15
depressing. But the other side of the
3:17
coin is spending cuts and economists are
3:19
increasingly of the view that Reeves
3:21
will have to demonstrate some serious
3:22
discipline at the budget if she is to
3:24
retain the confidence of the bond
3:26
market. Moyen Islam fixed income
3:29
strategist at Barclays is clear without
3:32
reductions in spending to deliver the
3:33
sums required solely via tax increases
3:36
could require breaking manifesto
3:38
promises. He added that need for
3:40
credibility enhancing policy choices is
3:43
the price that the government must be
3:44
seen to be paying in order to provide
3:47
reassurance to a wary market that has
3:49
been quick to move sharply on any
3:51
perception of rolling back on fiscal
3:53
policy choices. Jordan Rochester, top
3:56
analyst at Mizuo, formerly of Namura,
3:58
yesterday spelt out seven possible
4:00
market reactions to the budget based on
4:03
the amount of fiscal headroom Reeves
4:05
generates and crucially how she
4:07
generates it. Now, two of these
4:09
scenarios were broadly positive, one was
4:11
neutral, and four were negative, two of
4:14
them were very negative indeed, as
4:16
flowcharts go. It was a pretty sobering
4:18
one. And the truth is, Labour now just
4:20
risks presiding over a situation where
4:23
meaningful spending cuts are deemed
4:24
politically impossible. And so, in order
4:27
to make the numbers add up, as the
4:28
chancellor puts it, tax rises are deemed
4:31
the only necessary and appropriate
4:33
response, not just at this budget, but
4:35
at future budgets. What's needed is
4:38
urgent progrowth policies, including an
4:40
immediate easing of the tax burden on
4:42
people and businesses combined with
4:44
credible reductions to public
4:46
expenditure. Instead, we get higher
4:48
state spending paid for by higher taxes.
4:51
It's a road to ruin and we are already
4:54
quite a long way down it. That's it from
4:56
me this week. Stay up to date and in the
4:58
know with the city app and on cityam.com
5:01
and I will see you next week.
5:06
Go to citywinners.co.uk.
5:09
Good luck.
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