Pressure on Hunt to pull out the rabbits and lift our spirits

After what can only be described as the dampest squid of King’s Speeches – even the King looked bored out of his brains – there’s growing pressure on Jeremy Hunt to come up with some sparkle in his forthcoming Autumn Statement.

Hunt will need to find more than a couple of the proverbial white rabbits to pull out his chancellor’s hat if the government is to have even the remotest chance of lifting our spirits. Or indeed of being taken seriously. While it hurts to say this, it’s hard to disagree with Sir Keir Starmer’s comments, made in response to Rishi Sunak’s speech outlining the next parliamentary session, that the Tories “are not even pretending to govern anymore, they’ve given up on any sense of service.”

Unfortunately, Sunak gave no sense of the urgency of the task ahead in getting the economy motoring again – he has perhaps been too busy preparing for that Elon Musk interview on the future of AI, the only time the PM has really appeared animated.  

There was certainly no sense of urgency on how to lift spirits on the ground level where the outlook is getting gloomier by the day, a situation made worse by the thousands of homeowners who will be coming off fixed rate mortgages over the next month or so and will soon be facing payments double the amount of what they are paying now. 

If the architects, builders and property developers I’ve been talking to are to be believed, they have never known the housing market to be so flat. New builds are more or less static while homeowners looking to upgrade or redecorate are few and far between. 

Yet most importantly of all, the mood is particularly gloomy among the start-up and SME community where innovative entrepreneurs looking to raise new capital report back that only a very few venture capitalists are willing to take risks. Money is simply not moving. Those who have money to invest are keeping their powder dry and waiting to see what happens next, particularly on the interest rate front. That’s not a great mood to have in such sluggish economic conditions, and one that can easily turn into a vicious circle, or in jargon, a doom-loop. 

So what can be done to life the mood? The UK economy finds itself caught on the horns of a twin dilemma: the highest tax burden for more than 70 years and exponential public spending. 

Therefore, the most obvious way to get the juices going would be for Hunt to take a knife to taxes, not only trimming tax rates but making them simpler. He should look at the Isle of Man as an exemplar where all tax rates are set at 20 per cent: such a brave stance would lead to hundreds of HMRC tax officials being out of a job but there is such a shortage of labour right now that it’s not beyond the wit of man for them to find new work. Helping those start-ups would be a start. 

Until now, the chancellor has predictably resisted any such moves, arguing that cutting tax would be irresponsible while inflation is so high. Yet inflation is coming down fast, and despite the chaos in the Middle East and fears for energy supplies, does not seem to be on the move.  

In September, the rate of increase had slowed to 6.7 per cent, nearly half of what it was a year ago. More recent data on food prices confirmed the direction. This is a good sign and suggests that Sunak and the chancellor are on target to meet their ambition of halving inflation by the end of this year, even though if this is achieved it will have had little to do with their policies but all to do with world events. 

Although Hunt has ruled out tax cuts, one of his rabbits could be to cut inheritance tax or be bold enough to abolish it altogether – that would cheer up many and certainly be politically popular. It’s currently charged at 40% over the tax-free threshold of £325,000, a level which could easily be lifted. One of the tired arguments trotted out against abolition is that only a few homeowners are affected: that’s disingenuous, either you are for it or against it. 

Also on the supply side, Hunt – who claims to want to be serious about reforming the UK’s capital markets to improve equity investment – should look at what’s been done in Sweden. Over the last ten years, the retail ownership of shares there has soared to 22 per cent, a result helped by simplifying buying stocks through an investment account known as an ISK and introducing an annual low tax rate of one per cent on the value of assets. How smart. Access to capital for small companies has shot up. What a surprise. In contrast, private share ownership here in the UK over the last twenty shares has plummeted to 11 per cent.  

Hunt could also lift some of the tax thresholds which have been frozen for six years and which, by their very nature, lead to an increase in tax revenue. The threshold at which tax is paid is usually raised each year to account for inflation but the government’s decision to freeze them – first introduced by Sunak – means that millions of low earners were brought into the tax system for the first time while middle-rate taxpayers are being dragged into higher rates and paying more tax too.

It’s what is known as fiscal drag and, according to Doug McWilliams, who as readers will know, is a regular Reaction contributor and deputy chairman of the Centre of Economic and Business Research, will lead to a much bigger tax burden. Indeed, ONS figures for September showed that tax receipts shot up to £77.3 billion, £3.4 billion higher than the same time last year.

What’s more, McWilliams, who is also co-chairman of the Growth Commission, the group of economists from around the world set up by ex-PM, Liz Truss, to look at alternative strategies, is highly critical of the government’s use of “fiscal drag” as a way of raising revenue, claiming it amounts to subterfuge. 

He’s right; this is taxation by stealth. The Growth Commission estimates that the £75 billion a year raised from the 2027-28 tax year is the same as a 9p in the pound rise on all rates of income tax. 

McWilliams and his commission colleagues will be revealing their own “Alternative Budget” next Tuesday, a week ahead of Hunt’s Autumn Statement on November 22. They will be announcing plenty of rabbits which they believe will rekindle growth through supply side reforms but also measures to bring down public spending, and therefore both spending and taxes. Hunt should listen in – it’s never too late to do the right thing and be brave. 

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