Just one more volte-face, Rachel, and it could be crisis averted

Yahoo

31-07-2025

Sir Keir Starmer and Rachel Reeves gained power committed to achieving growth – but our economic problems go far deeper than improving GDP.
The key to us sharing in rising prosperity can be seen by observing how other countries improved their living standards – and it lies in solving Britain's poor productivity.
Britain is in the grip of a productivity crisis, and our Chancellor has made it worse by raising capital gains tax. While productivity grew at a rate of 2.5pc in the years before the financial crisis, in the years since, the annual average growth in UK GDP per hour worked has been just 0.5pc, with no sign of an improvement.
A report from The Productivity Institute argues we need to solve Britain's massive shortage of capital that few politicians talk about and, if anything, make the problem worse.
The report reveals UK workers benefit from 33pc less capital per hour worked than workers in high productivity peer countries (the US, Germany, France, and the Netherlands).
Average UK real wages from 1970 to 2005 grew on average by 33pc per decade, but since then have flatlined. The comparison with the US is particularly stark.
Since 2005, US labour productivity has grown at an annual average of 1.4pc, almost three times faster than in the UK. The result is much higher living standards in the US, with salaries some 30pc to 50pc higher than UK equivalents.
If UK private investment had matched the average of France, Germany and the US since 2008 – requiring additional investment of just over 2pc of GDP annually – UK GDP today would be nearly 4pc higher, equivalent to an extra £1,250 per worker in annual wages.
It is capital that finances the new machines and new technologies that enable workers to become more productive. Increased productivity leads to higher wages, demonstrating the fact that much of the benefits of capital accrue not to its owners' return on investment, but to the workers whose increased wages depend on it.
Without much more capital, wages will remain depressed.
It requires a major effort to turn this around. As The Productivity Institute notes: 'Marginal increases to public investment combined with minor initiatives to encourage private investment are a distraction, and do not constitute a strategic take on the issue.'
In particular, dribbling bits of extra cash into Britain's inefficient and unproductive public sector and calling it 'investment' is not the solution.
Moreover, the increasing share of national resources taken by the public sector – about 45pc of GDP – is a direct cause of Britain's productivity problem. Productivity across the public sector is still 4.6pc lower than in 2019, with the health service in particular an amazing 10pc less productive.
The first corrective step is to stop sucking capital out of the private sector through high capital taxes. When you are in a hole, stop digging. Capital taxes don't raise much revenue, but they have a catastrophic effect on investment.
When capital taxes are lowered or eliminated, the expected return to investors is raised, leading them to invest more. The reverse is also true. When capital taxes are raised, the returns on capital fall and people invest less. Rachel Reeves chose the wrong route by raising capital taxes.
Secondly, lower the burden of taxation on companies. Britain has the third highest rate of taxation of corporate income in Europe, which actively discourages investment.
It's vital we make it worthwhile for pension funds to invest in Britain again. Gordon Brown's removal of the pension dividend tax credit is most to blame for stopping pension fund capital investment, but today's stamp duty on British share transactions is also a major factor.
Thirdly, we must slash Britain's absurdly high energy costs. The cheaper that energy is, the more goods and services can be produced per hour at competitive prices. Yet energy capacity has been reduced since its peak in 2005 – and our trend rate of productivity has slowed sharply.
Fourthly, we must do more to attract wealthy investors from around the world, not drive them away.
Cutting capital gains tax and corporate taxes isn't just about boosting profits for investors, it's about creating the conditions for businesses – large and small – to thrive, and for workers to share in the rewards of that success.
When businesses invest in productivity-enhancing technologies and processes, it leads to higher output, greater efficiencies and better pay for workers.
Improving productivity is not some desktop theory, it is what has made other countries more prosperous. If Rachel Reeves wants to achieve higher tax revenues, she must cut capital gains tax, not raise taxes even more.