The editor reflects on the UK's unhappy position on tax rises and a lukewarm economy, as the Autumn Budget data comes into view.

There is truth in the idea that working hundreds of miles from home lends perspective. Well, this week I am in Dubai, observing the bustle, gleaming buildings and dynamism of this Gulf region financial centre, tech hub and travel destination. Remember, Dubai was a modest settlement half a century ago. Today, it is one of the world’s great commercial centres. 

And it is difficult not to notice how many UK expats live in Dubai, with many coming here in recent years. According to international mover’s firm John Mason, there are about 240,000 UK citizens in the jurisdiction: the same as the entire population of Wolverhampton in the UK’s West Midlands (source: City Mayors Statistics). There are reasons for this large population, and one of those is tax. Dubai does not levy income tax on salaries, investment, or capital gains. VAT is just 5 per cent; and there are some excise taxes, a one-time fee on property transfers and some other residential fees. Corporate taxes are low, and zero on firms up to a certain size. Of course, much of Dubai’s phenomenal growth stems from oil – not a trick that every place can copy. And at some point, as the urban maturation takes effect and growth decelarates, maybe certain taxes will rise or be imposed for the first time. 

The allure of low taxes and warm weather in late autumn and spring (it is hellishly hot in the summer) is all the easier to understand when you consider what Rachel Reeves, UK Chancellor of the Exchequer, is likely to do on 26 November. While there has been so much leakage and speculation about what taxes will rise, and on whom, tax rises of some sort there will be. 

The government thought it was perhaps buying time by holding a budget somewhat later in the calendar year than is typical. But what it has also done is give the media months of time to speculate, and the lobby machine in parliament has worked overtime, feeding out ideas such as “mansion taxes,” rises in local taxes known as the council tax, and hikes to income tax. (The idea of a rise to income tax has, apparently, been scotched.) There is speculation that private pensions will be squeezed. 

At one point, Reeves was even considered to be thinking of an “exit tax” to penalise those UK citizens who leave the country. It raises images of the days when, until the Conservatives won office in 1979, the UK had exchange controls. (The US, it should be acknowledged, imposes a sort of exit tax on any US citizen who chooses to renounce their citizenship.) Hitting owners of high-value homes isn’t necessarily obviously smart politics – cash-poor/asset-rich older adults tend to be more likely to vote. 

From where I see it, some squeeze on properties, pensions and perhaps a further bout of “fiscal drag” – not raising income tax in line with rising nominal income – will do much of the heavy lifting in the latest round of tax increases.  

The government has a so-called “black hole” in its budget of around £42 billion ($54.2 billion). The UK economy is growing relatively slowly, with the rate expected to remain modest at 1.3 per cent for this year and next, according to the IMF. Slow growth means slow revenues, and if spending keeps rising, a doom loop builds. Various forces are blamed for this. The government arguably has worsened the picture by hiking payroll taxes (National Insurance on employers) in the end-July budget of 2024.

Reforms to public services such as healthcare, and to a welfare system handling large numbers of those not in work or seeking it, have so far not taken shape. When the government sought to trim welfare payments a few months ago, rebel Labour MPs refused to countenance the move. If a government with a large majority in the House of Commons cannot make a change, it does not bode well. And spending pressures are unlikely to abate, given demands for more spending on areas such as defence.

So tax hikes there will be. This will hurt the UK economy in the medium term, even if there is a positive jolt to revenues over a few months. Capital is increasingly mobile, and many people have pre-emptively decided to make their move before further pain. (Hence all those British accents in Dubai.) It is true that rises in tax rates don’t always deter productive effort and risk-taking, but over time they have a cumulative effect.

There have been sceptics about what’s called “supply-side” economics – most famously associated with US economist Arthur Laffer. In my view the core argument is sound – incentives matter. After all, governments tax “sinful” activities such as drinking alcohol and smoking cigarettes on a sort of incentive logic. At the margins – where all economics ultimately operate – people become less entrepreneurial, have less appetite for risk in an affected country, and spend more time on leisure and non-monetary pursuits. Intuitively, it seems obvious. (I pushed against the critiques of supply-side economic ideas in this book review of a few years ago.)

A tax-raising budget might give Reeves and her colleagues more “fiscal headroom” and possibly trigger a fall in government bond yields. But much depends on whether growth picks up and positive momentum can be generated. Reeves must pray that it does. And there's the wild card of what happens in the rest of the world economy.

One final thought: There have been leaks about what Reeves wants to do. The uncertainty casts a pall over the UK, dampening risk-taking and financial deals. Any move towards certainty will be welcomed. Had the board members of a listed company allowed investment plans to leak out, as has happened recently, regulators would have dropped the hammer on those involved for not upholding fiduciary duties. Given what’s at stake, maybe politicians are placed under a comparable duty as well?