A Nation Of Shopkeepers

If the UK actually is an economic basket case - then we should probably do something about it.

And to my small brain, there only seem to be three options.

1. Raise taxes

   
   

Booooooooooo.

Not very popular obviously, but likely in the short term nonetheless.

The government have done some work to date to address the imbalance between taxation on income (high) and taxation on assets (still quite generous actually) - but there is a limit to how much more money they can raise on this front as “asset taxes” are relatively “Laffer Curve” sensitive.

These taxes also account for a very small portion of the overall pie, and so raising them further won’t make much of a difference. Capital Gains Tax, for example, accounts for approximately 1-2% of total tax take every year. A drop in the ocean.

The alternative would be to raise taxation on income, but the government have already promised they won’t raise taxes on “working people”.

The tax burden on the country, as a proportion of Gross Domestic Product³, is as high as it has been historically too - so there doesn’t seem to be much juice left to squeeze from the tax orange.

2. Borrow more

   
   

We can borrow more to fill the coffers but again, this doesn’t look a great option on the face of it.

UK gross total government debt currently stands at 104% of GDP - its highest level since the early 1960’s. This means that, to use property parlance, we are in negative equity.

However if you allow me to indulge in a little “economic what-abouttery” for a moment, we can see that this figure isn’t disastrous relative to our peers.

Source: The IMF, via the FT.

Canada’s ratio is 113%, the US are at 123%, Italy 137% and Japan’s debt to GDP ratio is a casual 235%.

So called “advanced” economies can always run higher debt levels than “developing” nations can, primarily because we can always print money to pay off our debts in an emergency situation.

But even still it seems we are testing the bond market’s patience, as the UK’s long term borrowing costs rise ever higher.

Source: Bloomberg. The chart shows the 30 year gilt yield.

At the risk of stating the bleeding obvious, borrowing more will not help this situation.

Borrowing more today will only further increase our cost of borrowing, potentially creating a vicious circle.

It also leave us with less wiggle room if we need to borrow a lot of money quickly in an emergency (as we did during COVID).

3. Go for growth

   
   

Of the three options we have, this seems to be the best.

In the same way that no business ever went broke by having too many customers, having too much growth can’t ever really be thought of as a bad thing from an economic perspective. It cures a lot of ills.

Tax take rises as the pie grows and debt falls as a percentage of the economy, making our borrowing cheaper to finance and creating headroom for further borrowing to turbo charge growth in future if needs be.

So how do we do it? Tough question to answer, but this is a blog after all so lets give it a go.

First, we should better incentivise entrepreneurship and business ownership. Secondly, we must unshackle our major growth centres.

Our tax system at the moment does not particularly incentivise business ownership - certainly not to the extent it could.

To see how, let’s consider two fictional punters.

The first is employed, and earns £100,000 a year. Her “take home” pay after Income Tax and National Insurance will be £68,558.

Our second individual is a business owner, and his business generates £100,000 of profits. From this profit he pays himself a salary of £12,570, which is Income Tax free but £1,135 of Employer’s National Insurance is payable.

The profits of the business (net of our business owner’s salary and Employer’s NI) are subject to £19,119 of Corporation Tax. This leaves £67,176 which he can draw from the business as a dividend. This creates a further tax liability of £13,203.

So, after all these are taken - our business owner who generates £100,000 of profits takes home £66,543. £2,015 less than our employee.

Hardly much of an incentive to take on the fear, the worry, the sleepless nights.

‘Ah, but this is a flawed comparison Dave as the business is an asset which can be sold one day”.

Very true, and there are also tax breaks for those who sell their businesses. But even these have been chipped away at in recent years.

Business Asset Disposal Relief (the artist formerly known as Entrepreneur’s Relief) allows entrepreneurs to benefit from a reduced Capital Gains Tax rate of 10% on the sale of their business, but this is restricted to the first £1m of lifetime gains. After that it reverts to the normal level.

I know, I know. £1m is a chunk of change - but again, we are trying to incentivise folks to take huge risk here to provide for themselves, their families, their employees and their families. To grow the overall pie for everyone. It is a big deal.

Establishing a different CGT rate for owner entrepreneurs and minority shareholders would seem sensible to me. Maybe a guaranteed unlimited lifetime rate of 10% for business owners as and when they come to sell their business, while implementing an increase for investors in shares and property from the current CGT rate of 24% - say to 30%?

This would encourage a “productive” means of investment, while further addressing the imbalance between the taxation of income and assets.

The other challenge we have is that the UK, culturally, isn’t all that entrepreneurial. Changes to taxation would address this to an extent, but we also need to make it a bit easier for our growth centres to flourish as well.

It was important to increase regulation on financial services following the Global Financial Crisis, but we are all too adept at “fighting the last war” and there is a very good argument that the pendulum has swung too far the other way.

If Napoleon once referred to us as “a nation of shopkeepers”, I wonder what he would call us now? A nation of compliance officers probably.

We need to have an urgent conversation about (sensibly) de-regulating financial services, in turn removing the shackles from our major growth engine.

We need to similarly prioritise support for the areas where we are global leaders (Fintech springs to mind).

We need to make it easier for the small business to flourish. Reduce the administrative burden - sort out the VAT registration mess.

Finally, and most importantly, we need to reward “do-ers” rather than “talkers”. Make things, rather than meetings. Crack on, get on with it.

None of this would guarantee success, but it would be a decent place to start I reckon.

None of the above is intended to constitute advice to any individual. If you have any queries regarding your specific position, please consult a regulated financial adviser.