This is the sixth article in a series. Read the others here.
These have been the leakiest, most fevered pre-budget weeks in modern British political history. New peaks of political and media hyperbole amplify every successive gloomy prognostication – but beneath the justifiable pessimism lies under-noticed causes for guarded optimism.
State of the nation
Yes, there is the familiar litany of concerns about lack of investment and productivity. Too many of the opportunities in science and technology are being surrendered to overseas companies. British investors and pension funds continue to neglect their own backyard. The number of new company flotations has slumped.
But Britain is not about to go either bust or become a ward of the IMF, the charge levied by overexcited commentary from the Greens and the right. Even if the debt markets were to balk at the size of Britain’s debt service commitments, if necessary the tax revenue can be found to reassure them – however politically painful.
It has fallen to foreigners, outside the introspective declinist national conversation, to see the UK’s underlying strengths. Their buying has propelled a rise in the UK stock market by 16% this year – better than either the US or the principal markets in Europe.
Britain has three great economic assets. The first is our capacities in science and technology. We possess young tech companies in Europe. In tribute to their potential and threat, they are stalked by foreign, mainly American, predators. With the right ecosystem of support, Britain could develop a £1tn tech economy by 2040.
The second is that Britain has created a broad-based, agile and internationally competitive service sector economy. We are the world’s second biggest exporter of services, which, coupled with the strength in tech, gives the economy an underlying resilience that has manifested itself this year – part of the reason for the confidence of overseas investors.
And last, Britain still retains financial muscle. There is up to £6tn of savings capable of being channelled into supporting our growth companies and deepening our infrastructure – and a critical mass of City investors, if still a minority, who want to put their shoulders to the wheel.
A growth budget?
These are assets Britain must build on to achieve growth, the chancellor will argue, even as she raises a cool £20bn in taxes – hardly growth-inducing. To her credit, she has budgeted to run public investment at the highest sustained level over this parliament for more than 50 years, even if it is still lower than the international average. None of the many leaks and flying of kites has suggested a retreat from that commitment. Indeed the coming stringency is to obviate the risk of cutting back these plans. Now the stress is on accompanying efforts to stimulate the growth of young, fast-growing British companies congruent with the industrial strategy and the wider operation of the saving and investment system.
Entrepreneurship and investment
Thus the launch of an “enterprise package” to stimulate development of our young innovative companies as they grow in scale, to keep more of them in Britain and then to float successfully on the London stock market. This replenishment of Britain’s stock of ageing companies with the new is crucial to the growth process. A lot needs attention, ranging from vastly increasing their access to British risk capital as they grow, to improving their chance of winning orders from too mean public and private procurers.
One strand in the package will be to address the high costs of a flotation and then, once floated, the subsequent lack of turnover and liquidity of the shares, so making the exercise pointless. Expect tax relief to be offered on the costs of flotation, and then a stamp duty holiday of at least three years to encourage investors to buy shares in Britain’s next generation of companies.
Too many British entrepreneurial founders sell out to predators too early, never meeting their promise. Already there are reliefs on capital gains tax for bona fide entrepreneurs. Those could be extended and made more generous with a “founders” relief that allows a founder, under certain circumstances, to sell a tranche of shares with zero capital gains tax.
Another proposal is that such reliefs should only be applicable if the company remains owned and domiciled in the UK. There is also scope to extend the generous reliefs supporting investment in tech startups over a longer time period, perhaps over seven years, incentivising investors to make longer-term commitments.
Meanwhile, the flood of pension fund sales of British shares needs to be staunched, not only to encourage those post-package young companies to float in a more buoyant UK market, but to head off the risk that many more large UK companies will follow AstraZeneca and list directly on the New York Stock Exchange, with devastating consequences for tax revenue and the wider economy.
Thus the case for the expected reform of Isas – tax-free investment and savings accounts – so that savers are incentivised to buy British shares rather than sit on cash, and similarly incentivising British pension funds to invest in Britain.
Another drag on the London stock market is Britain’s dramatically higher stamp duty on share transactions compared with our competitors. Meaningful reductions have been ruled out on grounds of cost. Nor is the knotty issue of pension fund investment likely to be addressed.
After weeks of turmoil…
The chancellor will have met her fiscal rules, avoided too blatant breaching of Labour’s manifesto commitments and kept the show on the road. The enterprise package may be steps in the right direction to recognising the imperative to get behind our young tech companies, but they are only minor before the scale of what needs to be done.
The package to hold down the cost of living increases will again be sold hard, largely focusing on energy bills. However, the bigger story on Wednesday will be the smorgasbord of significant tax increases – largely to be paid, as we have been warned, by the better off, who will doubtless protest vociferously.
The process has not been edifying. Consumer and business confidence have been unnecessarily damaged by too much kite flying and damaging leaks. The Office for Budget Responsibility has been conferred too much power. Big initiatives to reform the tax and financial system look likely to be abjured.
Britain does have potential great economic assets, but much more financial muscle needs to be put behind them. Brexit, whose damage is largely unaddressed, remains the ghost at the feast. This budget promises to be better crafted than the rollercoaster ride of the past few months suggested – but there is much unfinished business if Britain’s growth rate is to be decisively lifted.
For Labour, time is running short.
Illustration by Observer Design