If the Chancellor wants growth she must restore business confidence
Confidence is fundamental to how businesses choose to invest and grow and at the moment it’s poor. If the Chancellor wants to turn this around she must listen to the City, says Sir Michael Snyder
With the UK economy in the spotlight amid rising bond yields, high national debt, concerns over inflation and rising taxes, I have been reflecting on our economy and the challenges we face.
The very high level of national debt is, unsurprisingly, largely due to the vast sums spent during the pandemic – on a scale comparable to WWII – with broad support for initiatives such as the furlough scheme across the political spectrum. This has been compounded by global inflation, driven by multiple factors, particularly the Russian invasion of Ukraine. Of course, there was also the Liz Truss “moment of madness”, with a budget that caused market chaos, interest rates to rise and confidence to plummet.
Political arguments about £22bn are fairly marginal and not particularly helpful. For example, large wage increases for train drivers are not universally popular, especially when compared to the struggles also faced by health and social care workers.
Clearly, the debt we have accumulated must be repaid over time, making higher taxes inevitable until sustained growth becomes a reality.
Taxes vs regulation
The UK government and the Chancellor are rightly focused on growth but need to be cautious in how taxes are imposed. Business sentiment is currently poor, partly due to political messaging ahead of the 30 October Budget and concerns about future taxation. In my experience, after a lifetime of advising businesses, sentiment is fundamental to how businesses choose to invest and grow.
Regulation is perhaps even more important than taxes. The proposed implementation of full employment protection rights from day one – or after a shortish probationary period – could deter entrepreneurs from hiring staff and taking the risks necessary to grow their businesses.
Having led Canada Corporation during the last Labour government, I know that professional and financial services are critical to creating national wealth and generating overseas earnings. It is excellent that the Chancellor has prioritised growth as an objective for regulators. However, this ambition must translate into action if we are to realise its considerable potential benefits: fostering innovation, driving growth and encouraging smaller entities to thrive.
Taxation is one of the key tools governments use to influence behaviour and incentivise growth. The Chancellor should explore methods of preventing misuse of the Inheritance Tax system through Agricultural Property Relief but also ensure that genuine small-scale family farms are left untouched. Likewise, the absurd 60 per cent marginal tax rate for those earning between £100k and £125k is a disincentive for the able and ambitious. Income tax should be progressive, yes, but not unfair.
The absurd 60 per cent marginal tax rate for those earning between £100k and £125k is a disincentive for the able and ambitious
Some pension reform may have been necessary, but taxing retrospectively is never a good way to build confidence. A more helpful approach would be to make the Self-Invested Pension Plan (SIPP) regime more permissive, allowing entrepreneurs to invest in smaller private companies and innovative ventures. Entrepreneurs, who typically hold these funds, are better suited to taking on such risks, driving growth where larger institutions may struggle.
Elsewhere, the proposals for large pension funds to invest in infrastructure projects are positive, but whether these entities can effectively support SMEs is questionable. Smaller, more agile investors are often better equipped to address the unique needs of this sector.
Ultimately, sentiment is the most significant driver of behaviour. We must focus on promoting the vast expertise and experience this country offers, particularly in professional and financial services, to restore confidence and inspire investment.
Sir Michael Snyder is a City veteran and Chairman at Oakglen Wealth. He has served as an elected representative for Cordwainer Ward since 1986 and was knighted in 2008 for services to business and Canada.