Alistair Darling’s April budget marked the end of New Labour. It was the party’s final divorce from the City.
Several of Britain’s most successful entrepreneurs, including Sir Martin Sorrell of WPP and David Levin of United Business Media, have already upped sticks and moved their enterprises to Ireland because of efforts by HM Revenue and Customs to capture a bigger share of foreign earnings. Others are lining up to go.
Throughout the Labour years, the government has been able to comfort itself with the view that a little more tax on enterprise will not hurt because quoted firms, private equity and hedge funds and individual entrepreneurs, would not leave these shores. But the budget was unfriendly to enterprise on several levels. There are three new taxes on high earners: the withdrawal of personal allowances from people earning above £100,000 a year from 2010-11, the new 50 per cent tax rate for earners above £150,000 a year for from 2010-11 and the restriction on pensions tax relief to just 20 per cent for people earning above £150,000 from 2011-12.
The changes will be seen as a betrayal of the entrepreneurs, several of them Jewish donors corralled by former Blair adviser Lord Levy in the period running up to government in 1997 and in subsequent years. Under Blair, Labour sought to portray itself as business friendly and its promise to hold higher rate income tax at 40 per cent was a continuing manifesto commitment. It led the then Chancellor Gordon Brown to look for new ways to raise income, such as the one per cent “surcharge” on employees’ and employers’ national insurance, earmarked for new spending on the NHS.
Among the most frightening aspects of all of this for entrepreneurs are the prospects for public finances. As tax revenues from the City have fallen off a cliff and the cost of bailing out banks escalated, the budget deficit has rocketed. Documents show that between now and 2013-14 the UK government will run up £703bn of new debts. Experts say this figure is almost certainly too modest and if recovery turns out to be less pronounced than predicted by Darling in the budget, then the deficit could be even higher.
Lower growth translates into falling tax revenues and higher costs for government because of the need to fund increasing numbers of people on welfare. In addition, the budget placed a likely cost of rescuing the banks at £51bn — also deemed too modest. Experts are agreed that the national debt could surge to at least £1 trillion and that the UK’s finances may not return to normal for a generation or the 2030s.
The concern is that the nation will face a decade of austerity as future governments seek to correct the imbalances. The politically motivated tax rises in the budget, intended to punish the well off and appeal to the less well off, may only be the start. Further harsh tax rises will be on the way with potential targets being national insurance, a higher VAT rate and basic and upper rate income taxes. On the spending side, savage cuts in public services will be necessary.
This is the dismal legacy facing the next government which most political watchers believe will be Tory. So far, the Conservatives have been keeping their powder dry on whether they will rescind the taxes on higher-rate payers. They have promised to repeal the extra half per cent on national insurance added in the November Pre-Budget Report.
But as the party of Thatcher, which brought down headline tax rate level, it will be hard for David Cameron to avoid making an eventual promise to do away with the new taxes. The respected Institute for Fiscal Studies has noted that revenues raised will be far more modest than expected. What’s more, higher taxes will only lead to people and businesses fleeing overseas and be a bonus for the tax avoidance industry. The nation faces years, if not decades, of harder grind.
Alex Brummer is City Editor of the Daily Mail