Tough decisions must be made to get the UK growing

Successful budgets are meant to be boring affairs, occasionally sweetened by a surprise giveaway. William Gladstone’s offering in April 1853 wasn’t so much a speech as an endurance test, clocking in at four hours and 45 minutes.

Gladstone still holds the record for the longest Budget speech, but his marathon shares a few parallels with the latest offering from current-day chancellor Rachel Reeves.

Back then, income tax – which, believe it or not, was meant to be temporary – was extended until 1860. Reeves froze income tax thresholds until the end of the decade. Gladstone reduced duties on hundreds of goods. Reeves also tried to bear down on prices in her second Budget.

But that is where the similarities end.

I don’t pretend to be a veteran. The economy has been in far worse shape than it is now. But the chaos before, during and after Reeves’s Budget was among the most shambolic episodes I have ever seen.

Yet this is not why I despair. It’s the sheer lack of ambition that has left me wanting.

“Growth is the engine that carries every one of our ambitions forward,” the chancellor declared. She used the word “growth” no fewer than 17 times during the hour she stood at the despatch box. But there was nothing in this Budget, nor the accompanying 150-page Treasury document, that boosts economic growth.

Even the under-fire Office for Budget Responsibility concluded that none of her measures moved the dial.

“Growth doesn’t just appear out of thin air,” Reeves said. It certainly isn’t likely to appear after £30bn of tax rises either.

Rather than simply attacking Labour’s plans, I want to offer two ideas that may help haul the economy out of its decades-long funk.

The first is recognising why we don’t feel rich. On this point, we must give the chancellor some credit. As her predecessor Jeremy Hunt highlighted, if the UK were as productive as the US, our GDP per person would be £8,000 higher every year than it is.

This is not an insignificant sum and it can only be reached by improving productivity. As things stands, Britons are on course to be no richer at the end of the decade than they were at the start.

Reeves claims she understands this. But what she lacks is a plan to tackle the most unproductive parts of the economy: the public sector. It must become smaller and more agile if it is to thrive.

On paper, there is a plan. At the 2025 spending review and Budget, the government set out an ambition for all Whitehall departments to deliver at least 5 per cent “efficiency savings” before the end of the decade.

This equates to roughly £18.9bn, at least half of which needs to come from the NHS. But plans can slip. TheInstitute for Fiscal Studies warns that if the government delivers only half of this, public spending will need to be topped up by £9bn before the next election. That’s more than a penny on income tax.

I have argued in Business Leader that Britain’s older and sicker population means tough choices lie ahead. In my view, moving away from universal healthcare free at the point of use is inevitable if the UK is to avoid becoming a health service with an economy attached.

The alternative is endless tax rises to sustain a public sector growing faster than the economy. Productivity must improve if we are to raise living standards. And that must start with the services we all pay for.

We must also stop penalising people who want to move up the career ladder and earn more. People earning more than £100,000 are among the most productive in society. They should not face a 62 per cent tax rate once their earnings pass six figures. The result? More GPs working parttime and workers stuffing money into pensions to avoid a pay rise. What madness is this?

Hunt wanted to do something about these so-called “Henrys” (High Earners, Not Rich Yet) but found it too politically difficult. It is even less likely that a Labour chancellor will take action.

But doing nothing means relying on a shrinking number of workers to pay the bills. It’s worth looking at how the tax burden has shifted over the past decade and a half. The average worker now pays less tax on their income than at any time since the 1990s. Tax rates have fallen over the period, even as government subsidies for working families have gone up.

It’s a very different story for higher earners. HMRC data show that the top half of earners, or anyone earning above £31,300, now pays 90 per cent of all income tax.

The top 1 per cent alone pay 27 per cent, up from 25 per cent in 2010 and 21 per cent at the turn of the century.

It’s not just those at the top either. For those claimants who subsequently find a job, the government starts clawing back 55p of benefits for every £1 earnt.

Fair enough, you might think. But once other forms of support are withdrawn, such as council tax reductions, the marginal tax rate (the rate faced by people for every £1 extra they earn) can be more than the 62 per cent faced by higher earners.

There must be a better way to encourage people to work rather than rely on welfare. Make work pay. Spend money more wisely. Two simple principles that would put the economy and public finances on a firmer footing. This chancellor – and the next – must not let ideology blight sensible policymaking.

Our economy depends on it.