RUTH SUNDERLAND: Danger of a Hair Shirt Budget

Two huge challenges await Jeremy Hunt and Rishi Sunak in this week’s budget.

The first – which everyone is talking about – is the restoration of the credibility of public finances. The second, and even more important challenge, was described earlier this year by Sunak in his Mais Lecture: fueling growth.

Liz Truss and Kwasi Kwarteng understood that essential point, but based their thinking on the flimsy foundation that this could only be achieved through tax cuts, and then without funding. Hunt and his neighbor must 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 destroy the incentive to perform. The suggestion of a return to Labour’s 50 per cent rate for people earning more than £150,000 would do just that. That includes lowering the threshold at which people start paying the top rate of tax to £125,000. It would be a grand political gesture, but as pointless as Truss’s attempt to scrap the 45p tariff – and profoundly anti-ambitious.

The impact would not be limited to the very well-paid: the middle class is being pocketed through a stealth tax. Freezing benefits and thresholds – already shelved until 2025/26 – for another two years seems almost certain and discourages middle earners from chasing pay rises and promotions.

According to the Center for Economics and Business Research, tax drag will cost taxpayers £52 billion over the next five years.

Even the Institute of Fiscal Studies, which is not exactly right-wing, is critical of this taxation technique because it is opaque and unpredictable. It’s probably inevitable too, more it’s a pity.

So what can be done, within the constraints?

Hunt and Sunak must stimulate investment, skills and innovation. Business investment in the UK has been low since the referendum. The corporate tax hike isn’t helping, and while it seems unlikely there will be another turnaround, Hunt could still be a boost to investment.

At the same time, foreign predators with a keen nose for cheap assets have been allowed to build large stakes in our largest companies, including the Royal Mail, BT and Vodafone.

Ministers would increase national prosperity by protecting our assets from foreign raiders. This would cost nothing: they would only need to use their new powers under the National Security and Investment Act to keep R&D and quality jobs in the UK.

Shortages of labor and skills are holding back growth. A major exercise is needed to retrain and re-motivate the staff. Tax benefits for training could be a start.

Economic inactivity is a plague, 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 kind of people needed to help create growth. Hunt should think carefully about whether punitive tax rates and pension rules might lead people to conclude that it’s not worth working.

He and Sunak are correct in thinking that growth cannot be achieved solely through unsecured tax cuts or increased government spending.

But they have to be careful not to overdo the hair shirt. One of Rishi’s favorite economists, Adam Smith, argued that growth is driven by the ambition, virtually all of us, to improve our own condition and that of those we love. A tax on aspiration is a tax on human nature.