The countdown to the October 30 budget starts now. 3 months into power, and the priorities of this Government are becoming clear. The question is how to pay for these policies the Government want to implement. For context, the inflation busting public sector pay rises have already added 10BN to the budget, and there are likely to be more to follow. Without productivity linked reform, the danger is that this just results in inflationary pressure, at a time when the Government would be wanting interest rates to fall.

With that, the lesson from Thatcher is instructive. She spent her first term cutting the size of the state before implementing tax cuts. For the Labour party it is hard to imagine them doing this, equally the reality is, that the welfare state needs root and branch reform. For example, in 2018 there were 20 million people on social welfare, this has now risen to over 22 million. The ratio of 18-24 year olds not in education, employment or training is also at record levels. Pensions with the triple lock are becoming a ticking time bomb. Meanwhile the civil service has gone from 440,000 employees in 2015, to over 540,000 now. All the while, the Government needs the economy to grow by 2.5% GDP to ensure the ratio of debt to GDP does not grow, where this year it is forecast to be 1.2%. Even worse, is the harsh truth that the gdp growth the UK has seen this year is actually a function of immigration mainly. The calculations show that GDP per capita has actually shrunk. These are the challenges facing Rachel Reeves, as we approach her first budget.

The shadow of Liz Truss looms large here, and Rachel Reeves will want to avoid such a spectacular screw up. But the challenge she faces is her investment plans require extensive spending, and it is not clear how the numbers will work. There is talk of rewriting the rules governing the budget deficit, equally there is a warning that could trigger higher interest rates also. There are some bright points in the economy emerging. The Real Estate & Construction industry is geared to boom as housebuilding targets are to be enforced, and the NIMBY contingent are neutralized. Similarly, the plans for Great British Energy are significant. The Government is also planning an investment conference which they hope will result in significant DFI into the UK. And overall, the dominance of the Labour party electorally means that for business, they have certainty in what to expect, once Rachel Reeves shows her hand. And already signs of pragmatism are manifesting. The talk of IHT applying in full to non-doms is being diluted, as millionaires flee. Similarly, there is a realization that the proposals for adding VAT to private schools may not be as effective as initially thought.

Nonetheless, given the commitment to not increase headline taxes, it means that the Government will almost definitely need to increase capital gains tax, and there are rumors that entrepreneurs relief may well be removed as well, which if it happens, could be highly damaging for the long term cycle of innovation. Along the way, as we speak, September has seen a record number of company directors in PLCs sell their shares, ahead of the deadline, whilst in property, there is a real rush to get deals done. It may well result in October being a bumper month for tax collection, but at what cost to the economy, when it symbolizes people cashing out on UK PLC? The capital flows out of the UK in October in particular will be interesting to monitor. Watch this space. And like anything, there will be winners and losers. Expect the winners to be in industries with vested interests aligned to the Labour party. The north should pick up extra funding and investment, so should Scotland (GBP will be HQ’d there) but does levelling up the Labour heartlands have to be at the expense of the south?