In the 60âs and 70âs taxes were also very high. UK Government investment was about 4.5% of GDP and Private investment about 13 or 14%. From Thatcher onwards the drive for deregulation has seen the governmentâs spending on investment fall to about 1.5% of GDP while that of the Private Sector fall to around 8.5%.
The problems faced today are not so much from higher taxes but the lack of investment made prior to it coming to power, both by government and private sector when there was plenty of opportunity to do so when interest rates where lower than this year.
While higher costs on businesses from the budgets held under this government may have been a factor on increasing current unemployment rates there are other factors at play here. We tend to have relatively lower unemployment than other economies because historically our labour costs are lower, so companies tend to rely more on labour instead of investing in capital. As those costs rise, companies may look to use less labour and invest in more machines instead.
And, the flip side of companies choosing capital over labour is that it usually improves productivity, that feeds economic growth.
One only has to see all the talk about AI and the potential benefits it can have to stripping out costs for businesses to see that some of what we are witnessing could also be the initial impact from the companies investing in that new technology.
Another point I find interesting right now is Data. ONS have had growing problems since Covid in gathering reliable data as quickly as it used to. This has impacted the reliability, which impacts the quality of forecasts organisations make with it.
Since Labour came to power forecasts have frequently under forecast growth - revisions have I think mostly been upwards. People often pay less attention to the revisions which happen a month or two later. But these forecasts have a significant impact on the governments actions and room to manoeuvre. So it struggles to make the sort of investments into infrastructure quickly enough to get consumer spending and Private Sector investment back to the levels that would turn things round faster.
For example all the talk pre budget of a hole in government finances came about because of cuts the government didnât make to benefits (ÂŁ5bn), rise in borrowing costs (higher inflationary expectations some of which caused by events in the US- another ÂŁ5bn) and then a whacking ÂŁ15-20bn from forecasts (or even as much as ÂŁ30bn I think in some earlier ones) arguing that productivity/ growth will be slower in 4-5 years time than previously forecast. So, not necessarily something happening today but may or may not happen over a period of a few years.
(If forecast growth had remained at 3.75% instead of being cut to 3.5% the government would have had a forecast surplus of about ÂŁ47bn in 2030/31.)
Yet, look at what those forecasts such as that by the OBR were also assuming over the next 4 or 5 years;
- low investment (despite upgrading its forecasts this year for private and public sector investment by 2% to 2.75%, it forecast investment falling by 0.4% next year and an increase of 1% per year afterwards. Business investment reportedly grew 6% this year),
- Wage growth of around 2%
- Average rate of interest rates on mortgages within the economy above 5% (currently below 4%)
â Bond Yields above 5% (recent 10 year bond rates were 4.4%).
But it also sees inflation falling to the Bank of Englandâs target of 2% for most of that period, so expected Interest rates - and that on mortgages and bonds should also fall shouldnât it?
Falling rates of interest on savings is likely to lead to people spending more. Throw in the other taxes or changes within the budget to disincentivize saving and it may even be seen as a deliberate attempt to promote growth.
With most of the tax changes not due to come in until the end of Parliament, if the economy does grow faster than these forecasts have anticipated, the government will have plenty of opportunity to reverse many of them.
