RUTH SUNDERLAND: Danger of a hair shirt Budget

This week, Jeremy Hunt and Rishi Sunak face two huge challenges in the budget.

The first – which everyone is talking about – is restoring the credibility of public finances. The second, and even more important challenge, Sunak described in his Mais Lecture earlier this year: fueling growth.

Liz Truss and Kwasi Kwarteng had understood that essential point, but based their thinking on the weak foundation that it could only be achieved through tax cuts, and unfunded ones too. Hunt and his neighbor shouldn’t fall into the trap of swinging too far in the opposite direction.

In the zeal to restore order after the Truss debacle, they must be careful not to destroy the incentive to perform. The suggestion circulating of a return to the 50 per cent Labor rate for those earning more than £150,000 would do just that. So does lowering the threshold at which people will pay the highest tax rate to £125,000. It would be a great political gesture, but just as futile as Truss’ attempt to scrap the 45 pence rate – and very anti-aspirational.

The impact would not be limited to the very highly paid: the middle class is lowering their wallets through a stealth tax. Freezing allowances and thresholds – already on ice until 2025/26 – for another two years seems almost certain and discourages middle earners from chasing raises and promotions.

According to the Center for Economics and Business Research, ‘tax impediment’ will put £52 billion to the test for taxpayers over the next five years.

Even the Institute of Fiscal Studies, which isn’t exactly right-wing, is critical of this tax-raising technique because it’s opaque and unpredictable. It’s probably unavoidable too, more unfortunate.

So what can be done, within the constraints?

Hunt and Sunak should boost investment, skills and innovation. Business investment in the UK has been low since the referendum. The corporate tax hike isn’t helping, and while it seems unlikely there will be another turnaround, Hunt can still provide investment incentives.

At the same time, foreign predators with a keen nose for cheap assets have been allowed to build large stakes in some of our biggest companies, including Royal Mail, BT and Vodafone.

Ministers would increase national prosperity by protecting our assets from foreign raiders. This would cost nothing: they just need to use their new powers under the National Security and Investment Act to maintain R&D and quality jobs in the UK.

Labor and skills shortages inhibit growth. A major effort is needed to retrain and motivate the workforce. Tax breaks for training would be a start.

Economic inactivity is a scourge, with hundreds of thousands of people opting for early retirement, in many cases when they are at the peak of their professional capabilities and just the kind of people needed to help create growth. Hunt should think carefully about whether punitive tax rates and pension rules could lead people to conclude that work isn’t worth it.

He and Sunak are right in thinking that growth cannot be achieved through unfunded tax cuts alone or through increased government spending.

But they have to be careful not to overdo the hair shirt. One of Rishi’s favorite economists, Adam Smith, argued that growth is driven by the ambition, almost all of us share, to improve our own condition and that of those we love. Taxing aspiration is a tax on human nature.