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British Prime Minister Rishi Sunak and Chancellor of the Exchequer Jeremy Hunt at the Cabinet meeting in Downing street, Oct. 26.
Photo:
Stefan Rousseau/Associated Press
U.K. Chancellor
Jeremy Hunt
hoped on Thursday to announce a new budget that would reassure global investors that Britain’s fiscal house is in order. He sent them a message, all right: Go home.
There’s no other way to read a budget like this. Mr. Hunt is increasing income taxes across the board by freezing tax brackets until 2028 to make sure out-of-control inflation pushes up middle-class tax bills while their standard of living declines amid falling real wages. Britain has a labor shortage and will need to draw more Britons off the dole while attracting global talent. Mr. Hunt has told those workers not to bother.
The Chancellor and his boss, Prime Minister
Rishi Sunak,
are making a particular tax grab at highly mobile workers, especially in financial services, by reducing the threshold for the top 45% income-tax rate to £125,000 from £150,000. The Treasury pretends this will rake in an additional £3.8 billion in revenue over six years, but only if all those high earners choose to stay in the country to pay the tax.
Britain in the past could partially overcome the competitive disadvantage of high personal tax rates by offering workers the benefits of a growing economy. Mr. Hunt is likely to accomplish the opposite, thanks to all the other investment-thwarting tax increases he announced. The tax-free allowance for capital gains will decrease by about 75% over the next two years, to £3,000 from £12,300. Ditto the tax-free allowance for dividends, which declines to £500 from £2,000 (and had been as high as £5,000 in the 2017-18 tax year).
Mr. Hunt is increasing the top corporate tax rate to 25% from 19% and imposing a global minimum tax not even the European Union has managed to implement. To make sure businesses get the antigrowth message, he’s also increasing and extending a windfall-profits tax on energy producers.
Supporters say all this tax pain is the point. The U.K. was shaken in September by a bond-market selloff allegedly triggered by the tax-cutting proposal of former Prime Minister
Liz Truss
and Chancellor
Kwasi Kwarteng.
Britons have been told by politicians and too much of the financial press that only crushing tax increases can restore faith in public finances, moderate rising borrowing costs, and return the economy to growth.
Yet for all the talk of responsibility, the spending restraint is elusive. Most of the spending cuts don’t materialize until the 2025-26 fiscal year (conveniently after the next election), and the savings Mr. Hunt achieves before then owe mostly to a planned reduction in household energy subsidies. Which assumes Mr. Hunt will follow through in April when the economy is expected to be in recession.
The pound and the market for government bonds reacted placidly to Thursday’s announcement. But voters are more likely to notice the awful projections also released Thursday by the Office for Budget Responsibility, which expects real household disposable income to fall 4.3% this year and another 2.8% next year, predicts a two-year recession, and warns that measures such as Mr. Hunt’s corporate-tax increases will cut 0.3 percentage points off the annual business investment Britain needs to grow out of this mess.
Mr. Sunak’s Conservative Party ditched Ms. Truss’s supply-side tax and regulatory reforms in favor of this plan to tax and spend Britain to prosperity. One of those strategies boasts a proven track record of success and the other has a history of failure. The Tories can explain their choice to voters at the next election.
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