The closing of a local hair salon tells you why Britain is going bust

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8 hours ago

On Wednesday, Rachel Reeves will stand up in the House and announce her latest plans for saving the country from bankruptcy. Somehow, she will have to produce plausible remedies for a crisis that seems insoluble: how to deal with catastrophic levels of government debt when there are endless demands for more public spending including a brand new commitment to provide more funding for defence.
Having ruled out tax rises that clearly impinge directly on what they call 'working people' – income tax, VAT and employee National Insurance contributions – Labour has made this situation more complicated. But, perversely, they have chosen to make it even worse by pushing many of the most productive contributors to the economy out of business. The Labour Government, by putting supposed ideological solidarity over economic reality, has created the perfect formula for the failure of precisely the business sector which contributes most to national vitality and growth.
Let me offer an illustration in the hope that it might prove instructive to the present and any future Chancellor. A hairdressing salon that I know in a prosperous North London neighbourhood closed for good several weeks ago. It had been at its current location for over thirty years and was so popular that it often took days to get an appointment. After lockdown it recovered well with its loyal customers delighted to return. The emergence of the four day working week meant that Fridays became as busy as Saturdays and the salon was humming.
So what went wrong? The owner was hit simultaneously by the increases in the minimum wage and employer NICS. Added to ever-increasing energy costs (exacerbated by green levies), this burden finally broke them. Even though they were a well-run thriving business, they could not survive.
Sadly all of the junior staff and trainees were laid off. Given the economic climate now, they will struggle to find similar jobs anywhere else so they will not be paying any tax for the indefinite future and will almost certainly have to claim unemployment benefit: a double loss for the Treasury. The salon as a company has gone so it will no longer be paying corporation tax. The senior stylists who have carried on working privately are now self-employed which means they can, perfectly legitimately, claim all their work expenses against tax – so they will pay less income tax than they did under PAYE when they were employees.
You get the picture. The net effect of the Government's measures has been to reduce the tax take for their own coffers and increase unemployment among people starting out in their working lives whose chances are further damaged by the ridiculous stipulation that they must have full rights to secure employment from the day they are hired.
What happened to one hair salon might not seem all that significant to the nation's future. But this pattern is being repeated in small businesses – particularly the ones that provide employment to young people starting out in working life – in countless numbers. Retail shops, building services and hospitality outlets are cutting staff and failing to hire new recruits because the cost of employing them is back breaking. As a result, they are not expanding and developing their businesses as they might have – and so not contributing to the growth of the economy in the significant way that small businesses, with their inherent dynamism and industriousness, once did. Labour, in its supposed determination to support 'working people' has created a doom loop in which fewer people will be joining the workforce and the consequent reduction in tax revenue will make the government even less able to meet the limitless demands of the welfare system as well as pay off its debts.
Needless to say, there have been some obvious winners in the Labour dynamic: public sector employees have had their mouths stuffed with gold not only because Labour is historically inclined to favour the unions which represent them but because they can threaten disruption on a scale that reduces any complaining chorus from the small business sector to an inconsequential squeak. But there is more to it than that, in ideological terms: business generally, and small business in particular, are seen as inherently self-interested enterprises.
Because they have been created, developed and run by private individuals in the hope of making a profit, they must be morally suspect and less worthy of support than the services that the state funds and operates for the general good of society. Carry this to its logical conclusion and it becomes admirable to penalise people who want to profit from other people's need for their services in order to pay for the provision of services dispensed 'fairly' (and without profit) by the government. You know where this ends, don't you? The most innovative, resourceful, determined individuals who might have developed new ways of creating real wealth and employing more people in experimental ways have impossible demands put on them which threaten their survival or, at the very least, make their continued existence as difficult as possible.
They are encumbered with inflexible employment conditions which might possibly be appropriate for huge public sector organisations but are death to experimental emerging enterprises. Their tax arrangements are made so horrendously complicated and difficult to master that expensive accountancy advice becomes essential. I know self-employed sole traders in the creative industries who would like to enlarge their practice but are terrified of crossing the income threshold that would require VAT registration which now involves coping with Making Tax Digital – a peculiarly sadistic form of monitoring which, as HMRC has just discovered in its attempt to introduce it in self-employed income tax, can be susceptible to cyber hacking.
Yes indeed, create a business on your own and try to make it a success – just try. The Government, and its agents in HMRC who can't even be bothered to answer the phone, will make your life as difficult as possible. And the more obstacles they put in the way to prevent you from flourishing and expanding, the more virtuous they will feel even though you and the real wealth that you create are the only things that might have saved them.
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