Entrepreneurs should be terrified by Starmer's benefits about-turn

Telegraph

8 hours ago

Officials at the Treasury will be fretting over how they are going to fill the latest 'black hole' to open up in the public finances.
Economists at the Office for Budget Responsibility (OBR) will be worrying over how long they will have to forecast the impact on debt.
And the Bank of England will be worrying about how the UK can possibly sell £100bn or more of gilts backed only by the promises of a government that has clearly lost control of the public finances.
There are plenty of people with good reasons to feel worried about Sir Keir Starmer's latest reversal on welfare cuts. But it is Britain's entrepreneurs who should be most afraid. Why? Because one way or another, they will have to pay for it all.
It remains to be seen whether the Prime Minister has done enough to get his welfare reforms through Parliament, or whether he will have to offer the rebels on his backbenches even more concessions by next week. One point is already absolutely clear, however.
This is an expensive about-turn. According to the Resolution Foundation, an impeccably Left-of-centre think tank, the changes will cost at least £3bn, and of course, the real total could be a lot higher.
It comes on top of the concessions on the winter fuel allowance to pensioners, the above-inflation pay rises for the public sector, and the big rises in defence spending planned for the next few years. Add it all up, and the extra spending runs to tens of billions, for a government that was already racking up record debt.
We all know what is going to happen next. In the autumn, Rachel Reeves, the Chancellor – or Yvette Cooper, if the Home Secretary has already taken over by then – will be forced to announce another punishing round of tax rises.
It may well need to be more than the £40bn that the Chancellor squeezed out of the economy last time around. Where is the money going to come from? The Starmer Government promised at the election not to raise any of the three main taxes: income tax, VAT or National Insurance (NI).
It has already twisted that by claiming that the increase in NI for employers was not included in the pledge, and given the catastrophic impact on jobs of the last increase, it will be reluctant to raise that again.
It will almost certainly freeze thresholds beyond 2028, but while that will flatter the OBR forecasts, it won't raise extra money immediately. There is only one target left to raise any serious cash. Small businesses and entrepreneurs will have to end up paying the bill.
There are four big ways the Chancellor can target anyone who has started or owns a business. First, we can expect another big increase in the capital gains tax (CGT).
In her first Budget, a major increase in CGT was widely forecast. In the end, the increases were relatively modest, with the lower rate of CGT pushed up from 10pc to 18pc, and the main rate from 20pc to 24pc. With money so tight, we can't expect the Treasury to pussyfoot around with a few tweaks to the system.
The obvious move is to equalise CGT with income tax, so that a 40pc rate will be imposed on any gain of more than £50,000, and 45pc on any gain over £125,000. It can be levied overnight, so that business owners and investors won't have the option of selling out before it comes into effect.
Next, we can expect a big rise in dividend taxes. The tax-free allowance for dividends has already been reduced to a meagre £500, and after that they are taxed at 8.75pc for basic rate taxpayers, and 33pc and 38pc for the high rate.
The difference with income tax is meant to reflect the fact that corporation tax has already been paid on that money. But why not just equalise it with income tax, and get rid of the allowance completely, as has already been proposed by Angela Rayner, the Deputy Prime Minister, who is increasingly the backseat driver in charge of the Treasury.
It can be spun as 'simpler' and 'fairer', and will raise serious money.
Thirdly, expect a temporary 'surcharge' on corporation tax.
The French have helpfully pioneered this wheeze for the Treasury, with last year's 'solidarity levy' on companies with an extra 20pc or 40pc added to existing tax bills depending on the size of the business.
It raised some serious cash, with the luxury goods giant LVMH expected to pay an additional €800m (£684m) as a result, and the infrastructure giant Vinci €400m. It is hard for companies and entrepreneurs to get around that, and of course, ministers can deny, just about plausibly, that it is a tax on 'working people'.
Finally, the Chancellor will be painfully aware that many of the country's wealthiest people are leaving the country. So why not impose an exit tax? Germany, Norway and Belgium have already imposed levies of up to 45pc on anyone leaving the country for somewhere a little less punishing, so there is nothing to stop the UK doing the same. Either they stay and pay the corporation tax surcharge? Or do they pay the exit tax? Either way, the Treasury gets to collect a lot of money.
The important point is this. Reeves already had very little fiscal room left.
Her tax rises are collecting less money than forecast, and spending has started to spin wildly out of control.
Taxes will have to go up, and the only way that can be done is by hitting the UK's dwindling band of business owners and entrepreneurs.
There is nowhere else to go. True, it will be terrible for confidence, and will damage investment even more. But that doesn't mean it won't happen – and everyone in the firing line should be terrified of the latest about-turn.