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Andy Burnham should abolish national insurance, stamp duty, inheritance tax and the 45p top rate of income tax if he wants to revive Britain’s stalled growth, a right-leaning think tank has urged, in what would amount to the biggest shake-up of the UK tax system in generations.
Policy Exchange, in a report published on Tuesday, argues that the incoming prime minister should make cutting the UK’s tax burden, on course for a post-Second World War peak, one of his first economic priorities when he enters Downing Street next week.
For the millions of small firms writing a national insurance cheque every month, the most eye-catching recommendation is the last one. The think tank describes NI as “one of the most economically damaging features of the UK’s tax system” and wants it scrapped entirely, for employees and employers alike. That would wipe out at a stroke the levy behind the £28bn jump in employers’ NIC bills that has been blamed for redundancies and hiring freezes across the high street.
Family firms would also feel the difference. Alongside stamp duty, Policy Exchange wants inheritance tax gone altogether, a striking proposal at a time when tighter inheritance tax reliefs are already forcing family businesses to rethink succession plans rather than invest in growth.
The catch, and it is a substantial one, is the price tag. The think tank says the whole package should be funded by shrinking the state to 33 per cent of GDP. Under current plans, public spending is heading for 42.7 per cent of GDP by 2030-31, so the report is proposing a reduction in the size of government with little modern precedent.
Policy Exchange is careful to sequence the medicine. The first step would abolish the most “economically damaging distortions” in the system, including the withdrawal of tax allowances above certain earnings thresholds. These cliff edges can leave workers facing marginal rates of more than 100 per cent, meaning an employee can be better off turning down a pay rise, a quirk that will be familiar to any owner who has watched a valued manager decline extra hours.
Step two would scrap the 45p rate and inheritance tax while cutting spending to 41 per cent of GDP, protecting the planned rise in defence expenditure. Only then would national insurance go, funded by the full retrenchment to 33 per cent.
The staging is a tacit acknowledgement of the ghost at this particular feast: the September 2022 mini-budget, whose unfunded tax cuts triggered a gilt market crisis severe enough to require emergency intervention from the Bank of England. Policy Exchange argues that matching cuts in spending, introduced gradually, would avoid a repeat. The Truss package, by contrast, was barely offset at all and landed amid double-digit inflation forecasts.
Sir Sajid Javid, the former chancellor, lends the report his endorsement in a foreword. “The tax burden now stands at a 70-year high. More than that, the system’s structure has itself become a brake on growth. The most damaging examples of this do harm that is far out of proportion with the revenue they raise. Fix that, and we will begin to fix the economy,” he said.
Whether any of it lands with the incoming administration is another matter. Burnham has so far signalled only modest “room for movement” on tax, centred on rebalancing business rates towards online warehouses, while pledging fiscal discipline. With the tax take forecast by the Office for Budget Responsibility to hit a post-war high, SME owners hoping for the full Policy Exchange programme should probably not hold their breath. But the report puts the size of the state, and who pays for it, squarely on the new prime minister’s desk.
