Labour’s economic strategy is a tax trap that risks driving away investment and strangling growth
Public sector borrowing is now at a five-year high, and the Office for Budget Responsibility has just downgraded its growth forecasts. Against this backdrop, Labour is staking its credibility on a fiscal strategy built around targeted tax rises and closing so-called loopholes.
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On paper, it sounds pragmatic, spread the burden fairly, protect services, and reassure the markets that Britain is living within its means. In practice, it risks becoming a tax trap; one that penalises the very entrepreneurs and investors we rely on for growth.
Relying on a narrow pool of high-net-worth individuals and businesses to balance the books is short-sighted. There is only so much revenue that can be squeezed before behaviour changes. Raise the tax burden too far and you risk a flight of capital, a drain of talent, and a slowdown in investment.
I hear this first-hand from business leaders across the country. Expansion plans are being shelved, new hires delayed, and machinery upgrades postponed because of the constant chatter about higher taxes. Uncertainty is corrosive, and when it is compounded by the prospect of a higher bill, rational business leaders pull back.
SMEs, which account for 60% of UK employment, are the most vulnerable. Unlike global corporates, they cannot simply shift profits overseas or move operations. They are embedded in local communities, creating jobs and apprenticeships. Yet they are being squeezed by rising employer costs and threatened with yet more fiscal pressure. The danger is not just that wealth moves abroad, it is that ambition at home withers.
If the government is serious about fixing Britain’s finances, it must look not to ever-higher taxes but to the real driver of the deficit: inefficiency and waste in the public sector.
Departmental overruns are routine with consultancy fees running into the billions each year. Programmes are commissioned with little accountability for results. NHS procurement is a well-documented example, spending vast sums without securing value for money. The Ministry of Defence has long been plagued by projects that arrive years late and billions over budget.
This is about instilling basic discipline, which means delivering projects on time, procuring smarter, and demanding outcomes that justify the expenditure. Every pound wasted is a pound not spent on hospitals, schools, or investment in growth.
Instead of fixating on raising revenue from a finite group of taxpayers, Labour should be leading a root-and-branch review of government efficiency. Independent audits of departmental spending, caps on consultancy reliance, and transparent value-for-money reporting would all send a clear signal, waste will no longer be tolerated.
At the same time, there are smarter ways to support growth without simply handing out money. One example is targeted relief on Employer National Insurance Contributions for firms that hire from long-term unemployment. Such a policy, proposed by the Jobs Foundation, would reduce welfare dependency, boost productivity, and lower the benefit bill, all while strengthening the labour market.
That is how you build a virtuous circle, cutting waste, using savings to support enterprise, and helping people into work.
There is also a political truth here. Voters are wary of a high-tax economy. They may not follow every detail of fiscal policy, but they feel the drag when take-home pay shrinks, when small businesses close, and when opportunities dry up. A strategy built on squeezing ‘the wealthy’ may play well in soundbites, but it risks alienating the aspirational middle who want to see their hard work rewarded, not penalised.
Markets, too, watch closely and are reassured, not by endless tinkering with tax bands, but by evidence of fiscal responsibility and a pro-growth environment.
Demonstrating discipline on spending would do more to secure Britain’s credibility with investors than chasing diminishing returns from higher taxation.
It will be interesting to discover the views on this very subject of senior politicians and decision makers such as Sir Tony Blair and Jamie Dimon who have contributed to a new book, Prosperity through growth by authored by Lord Matthew Elliott and renowned US economist Dr Arthur Laffer, which is being published in the coming weeks.
Britain cannot afford to drift into a high-tax, low-growth trap. Businesses need clarity, confidence, and a policy environment that rewards risk-taking. That means focusing on where the real problem lies, the inefficiencies in our public sector, not the pockets of our entrepreneurs.
The government faces a choice. It can chase short-term revenue through ever-higher taxes and risk throttling the private sector, or it can take the tougher, more honest route by cutting waste, demanding efficiency, and creating the conditions for growth.
If Labour wants to secure both economic credibility and public trust, the answer is clear. Stop the waste. Support enterprise. And let Britain’s businesses drive the growth we all need.
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Kiran Fothergill is the director Pickerings Lifts & Chairman of The Jobs Foundation’s North East Business Council
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