The United Kingdom has big economic problems. Growth is largely stagnant, inefficient spending on bloated welfare programs is out of control, and taxation as a percentage of GDP is at the highest level since World War II. But things seem set to get even worse.
Wes Streeting, a governing Labour Party parliamentarian and front-runner to replace deeply unpopular Prime Minister Keir Starmer, has proposed equalizing capital gains tax rates with ordinary income tax rates. He argues that a pound (equivalent to $1.34) earned from assets should not be taxed less than a pound earned from work. Streeting supports taxing capital gains at rates of up to 45% for “high earners” (those earning more than $168,000 annually).
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Streeting’s proposal is economic insanity.
If enacted, the policy would deepen the U.K.’s economic malaise. The country already suffers from chronically low levels of business investment. Raising capital gains taxes would only worsen that investment deficit and discourage entrepreneurship. The United States is experiencing massive investment in artificial intelligence, semiconductors, and energy infrastructure. In contrast, higher taxes on investment would make it far more difficult for the U.K. to invest in the industries that will define the global economy over the next several decades.
The U.K. has experienced stagnant productivity growth for the past 20 years. Today, the average worker in the U.K. generates roughly $118,000 in annual economic output, while the average American worker produces about $171,000. Overall, U.K. productivity is approximately 20% lower than productivity in the U.S. Around 60% of its productivity deficit is attributable to lower levels of investment. The country has historically underinvested in physical capital, such as machinery and infrastructure. Compared to the U.S., the U.K. has also underinvested in research and development and other intangible assets. But incentives also matter. Raising capital gains taxes would further deepen the deficit in business investment. Because of weak productivity growth, the U.K. economy has endured two decades of sluggish economic expansion, contributing to growing government deficits. The country is trapped in a negative economic feedback loop in which low capital investment leads to weak economic growth.
One immediate reason for Streeting’s call for higher taxes on capital gains is the fiscal pressure facing the government. Government debt now equals roughly 93% of GDP, the highest level in 70 years. Financial markets remain skeptical of the government’s ability to control the deficit, contributing to high borrowing costs. Roughly 8% of government spending now goes toward interest payments on the national debt.
Instead of raising taxes on investment, the government should reduce spending by reining in welfare programs. Over the past 30 years, U.K. government spending has risen from 38% of GDP to 46% of GDP. Much of that increase is attributable to the expansion of the welfare state and rising interest payments on government debt. Lower government spending would almost certainly result in reduced interest costs on the national debt. A smaller government would free up resources for the private sector. In turn, a virtuous economic cycle could emerge: a more dynamic private sector, rising business investment, stronger productivity growth, and ultimately faster economic expansion.
TRANSCRIPT: WASHINGTON EXAMINER’S FULL INTERVIEW WITH WHITE HOUSE BORDER CZAR TOM HOMAN
Only by controlling government spending and encouraging private investment can the U.K. grow its way out of its current period of economic stagnation. But the Labour Party is increasingly controlled by its left-wing members of Parliament. Against both rational economic thinking and overwhelming global evidence, the country’s leftist leaders continue to embrace the path of economic decline through big state, neo-socialist policies.
Put another way, the U.K. needs a new Margaret Thatcher to save it from economic oblivion.
James Rogan is a former U.S. foreign service officer who later worked in law and finance for over 30 years. Now he writes a daily note on markets, economics, politics, and social issues.
