ALASTAIR MACMILLAN

30 December 2024,

Rt. Hon. Rachel Reeves,

HM Treasury,

1 Horse Guards Road
Westminster
London
SW1A 2HQ

Dear Ms Reeves,

During the recent election campaign, you said that you would make Britain the most attractive country to do business in and that economic growth was your priority.

Though many of us are not natural Labour supporters, the last government seemed to go out of its way to hamper business development, so we naively thought that you may have seen that things could be done better and were happy to give you the benefit of the doubt.

However, your recent Budget put paid to all of that and I and many others are still shellshocked by the slew of election promises that were so rapidly broken. The complete lack of intellectual coherence in policy is also very alarming. I find it particularly hard to understand what you were attempting to achieve in terms of long-term gain by these measures.

There would appear to be a complete misunderstanding of what makes entrepreneurs tick, and in fact basic human nature for that matter. That is in addition to a total misunderstanding of what a business actually is; who ultimately pays all the tax; and which part of the economy pays for the public services.

I can’t see from Your CV that you have ever tried to run a business let alone start one, so you will not understand why someone would risk their family’s wellbeing to start their own business. They do it to make money for themselves, but also to build capital for their family and control their own destiny. With over half of new businesses failing in the first three years, there is a high risk that those plans don’t turn out as well as expected however well planned. In most cases, even the best plans have to be changed along the way in order to stay in business. Initial working capital is often raised by investing savings or remortgaging the family home, so the risk has to be seen to be worthwhile.

Your changes to National Insurance, CGT and IHT dramatically reduce the potential reward. As humans we by instinct want to do the best for our children; we want to build something to pass on to them and your changes penalise that aspiration. You penalise us for employing people by substantially increasing the tax on jobs. You penalise us for continually reinvesting our profits in the future wellbeing of our businesses. What is the point of reinvesting when all we are doing is creating an ever-greater tax millstone that our heirs will have to deal with in the event of us dying within seven years of handing it on?

Perhaps you think it would be better to discourage the growing of family businesses; that we should save our heirs the hassle, and sell up to a buyer so you can harvest the CGT? What has not been widely mentioned is that CGT has to be paid by the estate of a deceased prior to payment of IHT, so a larger proportion of a business’s share capital will have to be sold to cover the tax than just that to cover the 20% IHT. This is an extremely short-term and destructive policy, as by destroying dynamic SMEs you are also destroying the innovative and dynamic part of the economy. Why do you seek to destroy rather than build?

A business is nothing more than a body corporate that sells goods or services in exchange for money.   In doing so, it will only survive if the value of its sales exceeds its costs, and is only sustainable if its customers are prepared to buy from it. No business can survive unless it has customers. It is they who pay the wages; without them there is nothing. If our costs exceed what the customer is prepared to pay for our goods or services, we die. Crucially those costs include those levied by the government in the form of regulation and taxation. The increase in employer’s NI adds over £600.00 to the cost of each employee, whether full or part time, and has to be paid for by our customers.

It is the private sector that pays for the public sector. Any tax collected from employees of the public sector or public sector institutions, is simply a recycling of government expenditure. That taxed on the profit of the private, productive sector and its employees, provides the state’s income that allows public expenditure to not only be sustained, but also to grow from year to year as the private sector grows.

If the burden placed on the private sector becomes too big it starts to shrink, as businesses simply can’t survive the hostile environment and entrepreneurs go on strike. This lesson was learnt the hard way in the 1970s, but seems to have been completely forgotten. The higher taxes go, the lower the tax take.

I hoped that following the aims articulated and the promises made by you at the General Election you would get the economy growing, in order to generate the tax revenue required to fund your plans. Instead, we had the invention of a black hole which needed to filled, though considering you and your colleagues had also committed to spend considerably in excess of this amount, what was in truth, on total government expenditure of over £1 Trillion, a rounding error of less than 2% became something much larger. Having now put the cart before the horse in this way, the economy has potentially been thrown into a doom loop of at best stagnation and at worst recession.

This is not helped by the above inflation increase in the Minimum Wage which has already led to massive wage compression, as it has not been set by the market or matched by productivity growth.   With a minimum wage salary now matching a basic graduate starting salary, what is the point in taking a degree when you can get a job without a debt to repay?

Ultimately, the only way that this situation is going to be reversed is through dramatically reducing the load on the private sector by cutting the public sector back hard. The public sector has been allowed to mushroom over the part decade and is now substantially bigger in every way than it was. Ironically, it is in many ways less productive than it has been for probably 15-20 years – a total disgrace. The longer this denouement is put off, the uglier it will be. Every single day one sees examples of government waste – one just has to look at the level of staffing in government departments, jobs that might be nice to have but are not actually bringing any real benefit to the country.

If you really do want to see economic growth, I would suggest you start 2025 by looking to encourage entrepreneurial aspiration. Encourage risk taking, and instead of trying to pile more load on the productive sector, cut the public sector cloth to match the resources available. You also need to relentlessly work on reducing the costs of doing business in the UK both through tax, regulation and energy, all at the moment increasing fast. This will gradually help us compete in what is an extremely competitive world market.

However, if your policy mistakes are not due to ignorance of what drives people to take risks, build businesses or do their own thing, and are instead based on a socialist hatred of private success and wealth, then there is little hope for Britain and even more of our talented young will, quite rightly, head overseas to build their futures.

(Photograph: © UK Parliament / Maria Unger, CC BY 3.0 <https://creativecommons.org/licenses/by/3.0>, via Wikimedia Commons)

Alastair MacMillan runs White House Products Ltd, a manufacturer, distributor and exporter of hydraulic components to over 100 countries. He is a supporter of the Jobs Foundation.

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This article (An Open Letter to Rachel Reeves) was created and published by The New Conservative and is republished here under “Fair Use” with attribution to the author Alastair MacMillan

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RELATED

The £100bn Labour spending promises that tipped Britain into crisis

Rachel Reeves’s maiden Budget allows for increased borrowing and big outlays on public sector pay

TIM WALLACE

Rachel Reeves’s record-breaking tax rises and bumper spending spree were supposed to be key steps in “rebuilding Britain” and “fixing the foundations of our economy”.

The grown-ups were back in charge, her supporters said, and the nation had moved on from the chaos of Liz Truss and the Conservatives.

The reality has been somewhat different.

The Chancellor sent business confidence into a tailspin with a £25bn National Insurance tax raid. Her plans raised a record £40bn in tax overall – but she none the less startled markets by still depending on extra debt.

Labour’s scheme involves extra spending on a gigantic scale, far outweighing the additional taxes. In 2028-29, Reeves expects to spend £100bn per year more than the Conservatives had planned.

Debt markets are worried. Government borrowing costs have surged, with yields on 10-year bonds at their highest since the financial crisis, and rates on 30-year debt at levels not reached since the 1990s.

Government sources point out that gilts’ travails are part of a global shift. Borrowing costs are also up in the US, on the back of Donald Trump’s victory in the presidential election and anticipation of his heavy-borrowing plans.

This has set the tone worldwide: Germany and France are also paying more to borrow, not just Britain.

Yet this does not get the Chancellor off the hook. Reeves set her plans in the knowledge that the world is an uncertain place.

Despite the risk of higher borrowing costs and slower growth, she pressed on with plans for an extra £100bn of annual spending and left herself with just £9.9bn of headroom to hit her new fiscal rules.

Holding back even one tenth of that expenditure would have doubled her buffer against adverse events.

Instead, she chose to keep less headroom than almost any chancellor before her – as Richard Hughes of the Office for Budget Responsibility (OBR) noted, just under £10bn is around one third of the £28bn average headroom maintained by Reeves’s predecessors dating back to the OBR’s founding in 2010.

The spare cash has now been more than eaten up by a surge in borrowing costs, according to analysis by Capital Economics, meaning the Chancellor will be forced to cut spending or raise taxes unless the picture improves fast.

Here is a rundown of the spending plans that pushed the public finances to the brink of disaster.

Public sector pay: £38bn

One of Reeves’s very first actions in Government was to dish out large-scale pay rises across the public sector.

Partly justified as a way to end strikes – which they did, before unions threatened more action for future pay rises – these were also seen as emblematic of the break between Conservative and Labour administrations.

Raises were typically in the range of 5pc to 6pc, and the Chancellor set out the cost at an estimated £9.4bn, over and above a 2pc increase previously budgeted.

Bigger increases were dished out to some public sector workers. For instance, the long-running junior doctors’ row was settled with an offer of a 22pc increase over two years.

Nor does this tell the whole story when it comes to the cost of public sector pay.

The number of government workers is ballooning, up from 5m at the start of 2019 to 6.1m now, so those higher pay packets are being paid to more people.

Additional increases are yet to come. In her Budget, the Chancellor announced more cash including £2.3bn for core schools spending which in part will go to the 6,500 more teachers in key subjects that were promised in Labour’s manifesto. On top of that, an additional £1bn is going into special educational needs and disabilities.

The OBR’s analysis of spending plans indicates government departments will spend almost £225bn on pay in 2029-30, up by £38bn – one fifth – from this year’s level.

The NHS: more than £25bn

Britain’s health service has not exactly been short of funding in recent years, but waiting lists have still grown none the less.

As well as big pay rises, Reeves announced a major boost to the headline budget, with an additional £22.6bn for day-to-day spending and £3.1bn for capital investment over this year and next.

This includes £1bn to tackle the backlog of repairs and upgrades, and £1.5bn for extra capacity, which the Chancellor said would include more hospital beds, more diagnostic tests and more surgical hubs.

It represents “the largest real-terms growth in day-to-day NHS spending outside of Covid since 2010”.

It also results in astronomical numbers: overall the day-to-day health and social care budget will break the £200bn mark in 2025-26, including £192bn for NHS England. On top of that comes £13.6bn of capital spending.

Welfare: £1.3bn

Some of the Government’s plans for benefits include hiring another 3,000 staff at the Department for Work and Pensions (DWP) to crack down on fraud and error. The hope is to save the public purse £4.3bn in 2028-29.

Restricting pensioners’ right to winter fuel payments seeks to save as much as £1.7bn per year, though that depends on how many people are prompted by the policy to sign up for pension credit.

But more spending is also on the way. An extra £1bn is going to the household support fund and similar schemes to help those struggling with the cost of living.

Pensions are also rising sharply, thanks to the triple lock – a policy that the Conservatives also promised to follow – and the ageing population.

Total pensioner spending, including other support such as housing benefit, is set to rise to £182.7bn by 2029-30, up from £150.7bn this year, despite the reduction in winter fuel payments.

It comes as part of an overall welfare bill which is set to rise from almost £314bn to £377.7bn by the end of the decade.

That is only £1.3bn more than was forecast under the Conservatives, with factors such as higher inflation being as important a driver of rising costs as any policy changes.

Other departments: including as much as £8bn for education

Swathes of other spending announcements came on top of this, from £2.9bn for the Ministry of Defence and a commitment to send £3bn of support per year to Ukraine “for as long as it takes”, to extra funding of £3.4bn for the Scottish Government, £1.7bn for the Welsh Government and £1.5bn for the Northern Ireland Executive.

There are big one-offs – £1.8bn to compensate victims of the Post Office Horizon system, for example, and £11.8bn of compensation for the infected blood scandal – while much more long-term spending is yet to be determined.

The Government is planning a full spending review later this year in which it expects to divvy up funds across departments.

The numbers are significant. In 2028-29, departmental spending is expected to come in at £72.7bn above that planned by the Conservatives, even before the extra £8.3bn of debt interest, welfare and other costs which take the total to £100bn.

The Telegraph: continue reading

Featured image: braveneweurope.com

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