UK Needs to Get Serious About Growth, Tory Contenders Told

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(Bloomberg) — The UK government is not serious about tax policy, levelling up, inequality or productivity because officials refuse to acknowledge the scale of Britain’s relative economic decline over the past decade and a half, according to a leading think tank.

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In a veiled attack on the Tory leadership contest, which has become a parade of tax cutting pledges, the Resolution Foundation drew attention to the UK’s “toxic combination” of low growth and high inequality. That mix has left the typical family almost £9,000 ($10,700) worse off than their equivalents in comparable countries, it calculated.

“A new economic strategy aiming to address this failure needs to be serious about the scale of change required, and go far beyond promises of tax cuts,” the think tank said. 

Resolution’s call for serious politics was echoed by the CBI, the UK’s leading employer group. In an open letter to Tory contenders vying to replace Boris Johnson, director general Tony Danker urged the candidates to “develop serious, credible and bold plans for growth.”

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Tax reforms should be singularly focused on boosting business investment and should “not fuel inflation,” he added. Economists have warned that tax breaks for households will only push prices higher.

Questions about the Tory party’s economic competence raised by the leadership contest have also been seized on by the opposition Labour party. Of the 11 candidates to declare, only former chancellor Rishi Sunak has signalled that he would put the public finances first, cutting taxes once inflation is brought under control.

In a speech on Wednesday, Shadow Chancellor Rachel Reeves will accuse candidates of taking “a flamethrower” to their own fiscal rules. Labour claims the tax cutting plans would blow a £24 billion hole in the annual budget deficit and drive up borrowing as a share of GDP. 

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“The tables have turned — any lingering sense that the Conservatives are the party of economic responsibility has been shredded to pieces over the past few days,” Reeves will say, according to extracts released by her office.

Reeves will pledge Labour will only borrow to invest, adding that the party would make the tax system more “fair” by getting rid of loopholes like non-dom status and private equity carried interest.

Both the CBI and Resolution drew attention to Britain’s poor recent record on productivity and forecasts for growth to fall to the bottom of the G7 group of industrialized nations next year. Britain is already facing one of the worst inflation shocks in the developed world and the economy is stagnating as household incomes are squeezed by soaring inflation, now at a 40-year high. 

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Official GDP figures for May on Wednesday are expected to show that economy continued to struggle, having shrunk for two months running.

In its report entitled Stagnation Nation, Resolution said that, since the financial crisis in 2008, the UK’s productivity gap with France and Germany has almost tripled to 16% from 6%, equivalent to £3,700 of lost output per person. Eight million young workers have never experienced sustained real wages growth, it said.

While the top 10% of households are richer than in many other European countries, relatively high levels of inequality mean that middle-income British households are 9% poorer than counterparts in France, and the poorest fifth are over 20% behind their French and German equivalents.

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In total, weak growth and four decades of high inequality have left typical families £8,800 poorer than in countries like Australia, Canada, France, Germany and the Netherlands, Resolution said. The government needs to get “serious about taxes” by shifting the burden to levies on wealth, it added. 

“Britain is a rich country, with huge economic and cultural strengths,” said Torsten Bell, chief executive of Resolution. “But those strengths are not being built on. We must turn this around, but we are not on track to do so. We underestimate the scale of our relative decline and are far from serious about the nature of our economy or the change required. This has to change.”

In his CBI letter, on behalf of 190,000 businesses, Danker called on Tory leadership contenders to “get the UK growing again”, setting out a series of initiatives to help the economy as the nation teeters on the cusp of a recession. 

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He also backed proposals from several leadership hopefuls to reduce corporation tax, which is due to rise from 19% to 25% in April, and said a new leader should look at the overall tax burden on business. A replacement for the super-deduction, a tax break on investment, would pump £40 billion into the economy, he said.

“We all know the serious challenges that the country faces today,” wrote Danker. “Eye-watering inflation putting households and enterprises under real pressure; firms unable to find the skills and talent they need in a super-tight labor market; and global supply chains remaining disrupted.”