This file photo taken on August 17, 2016 shows an arrangement of British 20 pound bank notes. Ireland is suffering because of Brexit. The pound has lost almost 20 per cent against the euro since the June referendum, squeezing the profit margins of Irish exporters. Irish mushroom farmers, who ship 80 per cent of their production to Britain, are going out of business.PAUL ELLIS/AFP / Getty Images
There is not much money, so we shall just have to manage as best we can.
That was pretty much the message from Philip Hammond, the new man in charge of the U.K. Treasury, delivering his Autumn budget statement. No one expected good news with Brexit looming in the background (except a few hysterical Europhobic Tory MPs) and he duly obliged with a hideous prognosis of a widening public sector deficit and soaring government borrowing.
There won't be any money for the JAMs, (ordinary families who are "just about managing"), the favourite constituency of Prime Minister Theresa May. Indeed, she may have shot herself in the foot by raising their expectations. Instead, welfare spending is capped and the government will be borrowing a staggering £122-billion ($205-billion)over the period to 2020-21, of which £59-billion is due to the cost of adjusting U.K. business to a world outside the EU.
It could be worse; even some pro-Brexit economists reckon the economic growth forecasts (by the independent Office for Budget Responsibility) are on the middling to optimistic side. What it points to is a much wider problem that goes far beyond Brexit: the U.K. economy isn't delivering the growth it needs to sustain the burden of the welfare state.
Since 2010, expectations of economic growth (leading to better government tax receipts) have been dashed, despite rising employment levels. This conundrum, strong job creation but weak income tax revenue growth played havoc with the plans of the previous chancellor, George Osborne, to eliminate the shortfall between government spending and tax revenues. Instead, his successor has been forced to push the promised land of fiscal balance way out beyond the horizon. Even with most people working, Britain is just not paying its way.
Worse still, from a political perspective, is the imbalance between the haves and have-nots. By that, I don't mean the widening chasm between rich and poor; from the chancellor's perspective the gap that matters is between those who have to pay tax and those who are exempt. We are not talking about cheats and avoiders; a crackdown on corporate tax evasion is starting to pay some dividends. We are talking about the government's increasing dependency on a small select group of very high earners to pay almost all the bills.
There are about 30 million taxpayers in the U.K.; their numbers increased since the mid-1990s but since 2011 have been in gentle decline due to Tory government policy of removing very low-earners from the tax net. Personal income tax accounts for about £170-billion, the biggest item of government revenue and an ever rising proportion. Tax from businesses is weak and expected to weaken due to a global rush to lower rates; oil tax revenues are falling fast and the numbers of smokers and boozers are dwindling.
Still, if employment is going up, you might think the outlook is improving for tax receipts. Unfortunately, the reverse is true; the jobs expansion is in low-skilled service sector jobs that don't pay well and where wages barely qualify for taxation. Instead, the bill increasingly falls on high earners. The top 1 per cent of taxpayers, about 330,000 people who pay the highest marginal rate of tax, account for 27 per cent of all income tax paid, about £46-billion.
Meanwhile, the bottom half of the U.K.'s work force pay less than 10 per cent of income tax and about three million people barely pay anything. But that's only fair, you might think, and you may be right but it doesn't half cause anxiety for the person in charge of paying the national bills when he looks about him and wonders who is left out there to do the heavy lifting.
Canada is not much better off; we don't publish such good statistics (and that is a shame) but the numbers are equally frightening. In 2013, more than a third of Canadians, about nine million, paid no federal income tax while the top 1 per cent of earners shoulders more than a fifth of the federal government's tax burden.
This is unsustainable; there is a populist uprising under way against elites. But the elites seem to be paying the bills that sustain the social programs that keep the majority afloat. In Britain, about 50,000 people are expected to stump up £22-billion to the exchequer, a select club of high net worth individuals that is likely to be highly mobile.
Neither Britain nor Canada can afford to lose the big earners to tax competition overseas. The wider question is what sort of lifestyle both countries can truly afford long term.
Carl Mortished is a Canadian financial journalist based in London.