Reeves can’t tax Britain out of the gloom
With growth stalling, inflation rising, and fiscal headroom gone, Chancellor Reeves must resist the urge to raise taxes and instead make government leaner, smarter and more efficient to keep the economy from sliding into darkness, says Brandon Lewis
Winter in the UK is a normally sunless affair. The one we’re headed for will be gloomy indeed.
If change does not come quickly, our economy and the businesses who help make it turn are at risk of being knocked into darkness. Inflation is creeping upwards, at double the Bank of England’s two per cent target, while government borrowing costs remain punishing as bond yields hit a 27-year high this past August. Business sentiment is at rock bottom, reaching the lowest level since late 2022 after a year in constant decline. In the face of this stormy backdrop Chancellor Rachel Reeves’ fiscal headroom of £10bn has almost certainly been wiped out for the second time in a year.
While building back its headroom is a priority for Labour, it’s been debated just how much is needed. At a conservative estimate, at least £10bn extra is needed to meet fiscal rules. But this to meet the “stability rule”, and cover day-to-day government spending with revenue by 2030, will require at least another £41bn.
Short on miracles, Chancellor Reeves seems poised to raise taxes. That would be a costly mistake.
Tax hikes may offer a short-term fix to the Treasury’s balance sheet, but they do long-term harm by deterring investment, slowing job creation, and eventually becoming self-defeating by crushing growth. Reeves is already eyeing a smorgasbord of taxes from applying national insurance (NI) on rental income to a capital gain tax on people’s main homes. But the obvious impact that an 18-24 per cent tax will have is simply that fewer people will sell and house prices, already unaffordable for many, will rise. It’s these kinds of taxes that in the long run, will continue to deprive Britain of talented workers and innovative firms.
Efficiency
Instead, the government must do what any well-run business does when faced with rising costs and tightening margins: become more efficient. This means asking hard questions about what the state is doing, whether it needs to do all of it, and how it can deliver essential services at lower cost without touching frontline provisions.
Labour almost admitted as much. Only last June, the government explored £5bn of welfare savings, dressing it up as a “moral mission” to fix the system. The political theatre was predictable, with MPs on the left treating the word “cuts” as if it were toxic, but the underlying point remains that the government is bloated.
There is no shortage of opportunity. The UK’s public sector has grown steadily over the past decade, adding new departments, agencies, and regulatory bodies, many with overlapping remits. Meanwhile, outdated IT infrastructure and slow-moving procurement processes waste billions each year. Businesses have to review operations constantly to stay competitive. The government should be no different.
Regulation is a prime example. British businesses spend more than £25bn annually on compliance with rules that are often outdated or duplicative. Regulatory complexity has catapulted costs of projects like Hinkley Point C from £18bn to £46bn. Streamlining regulation would save money, improve productivity, and make the UK a more attractive place to invest, all without costing the taxpayer a penny.
British businesses spend more than £25bn annually on compliance with rules that are often outdated or duplicative
Globally, competitors are moving fast. The UAE has a 0 per cent corporate tax rate, Singapore has pro-enterprise policies, and Ireland’s streamlined tax system are all designed to attract capital and talent. While Britain raises levies and clings to bloated systems, others are becoming more appealing to global investors. We can see the damage already, the number of UK taxpayers moving abroad has more than doubled in the past three years.
Government efficiency is a prerequisite for sustainable growth. A government that spends wisely builds the credibility to keep taxes low, attract investment, and create jobs.
Labour faces a pivotal choice. It can follow the path of least resistance, raise taxes, slow the economy, and risk another decade of sluggish growth. Or it can choose the harder but more rewarding road, reforming the machinery of government so it runs as effectively as the businesses it regulates.
While we can’t control the weather, the tilt of the economy is ours to set. Might as well tilt it towards the light.
Brandon Lewis is a former chairman of the Conservative Party