UNLEASHING “ANIMAL SPIRITS” MEANS EMBRACING RISK
⏱ 8 min read
At last, the UK Government message is one of shouting from the rooftops the potential of the UK, its attraction for investment and that policy making is to be driven by economic growth. Keir Starmer says growth will be “hard-wired” into Whitehall. Rachel Reeves wants to fire up “animal spirits”. Both of them are committed to “strip back regulation” and to UK economic growth remaining the “number one priority”.
These messages are underpinned by Government’s recent commitments to various infrastructure projects such as the third Heathrow runway – a positive decision; new reservoirs; and an Oxford to Cambridge technology corridor to match Silicon Valley. These are all to be welcomed but they are government driven projects and perhaps reflect a political belief that government can control the economic success of the UK, although they will be dependent in part at least on private investment. Also, it is pretty well recognised that it is a vibrant private sector which will really drive productivity and economic success, and it is really the framework to encourage that which the Government can and should deliver. For public sector services to meet the needs of the country, the Government has made clear it is only through growth, which includes real productivity increases and dependence on the private sector, that public services can be improved.
THE ENTREPRENEURIAL “ANIMAL SPIRITS” HOLD THE KEY
Risk-taking, innovation, hard work, commitment and energy are key features of entrepreneurs, people who have their own businesses or who lead businesses. Their confidence and self-belief are essential ingredients. And they need, perhaps as much as any other quality or assistance, to know their efforts are worthwhile and valued, with appropriate rewards. This aspect of encouraging growth has yet to be seen from this Government, and arguably proposed inheritance tax changes deflate the animal spirits more than fire them up. Take two examples.
First, new inheritance tax rules, to come into effect in 202, in effect can tax pension pots at a rate of about 80%.Imagine a young person who works hard in the private sector building a business or working successfully as a dedicated employee, highly skilled and well-trained. They manage to save a pension pot of £2million: to do that they will have had to earn £4million because the marginal rate of income tax for a high earner is about 50%. Under the new rules the pension pot, on death, will incur inheritance tax at 40% so that their £4million has now suffered a tax take of £2.8 million. Imagine too that their children pay income tax at 45%, and so, under the new rules, their inheritance of £1.2 million (£4million minus £2.8million) will incur a new tax of £540,000, leaving £660,000. The Government will have taken £3,340,000, that is more than 80% of this entrepreneur’s £4million in earnings. Is that really fair? Is that an incentive to do what the government wants those hard working, highly skilled and well trained “animal spirits” to do? Why would such a person work in the UK and feel motivated? Might they, for example, move to Dubai? It is perhaps relevant to recall that public sector workers with rich pensions are totally unaffected by these inheritance tax takes. That includes Keir Starmer himself. For a socialist government this may make good sense, but it does not make sense for a government which wants to unleash “animal spirits” and attract the best of the best.
Second, for 30 years or more, family businesses where succession is fundamental have been exempt from inheritance tax. From April 2026 they will no longer be exempt. For these family businesses, not just farms, relief will be capped at £1million, with IHT imposed at 20% above that amount. And apparently the Treasury estimates this will bring in tax revenues of only some £500 million by 2030. But at what cost? James Dyson, the leading UK private engineering entrepreneur, describes this change as vindictive, adding that it will destroy a number of family businesses and so cost the government a fortune in lost revenues. Why will it destroy them? On death of the main owner of a family business it will be valued. Certain businesses are valued on the basis of assets, but most on the basis of a multiple of earnings. This means that large amounts of cash will need to be found by the family inheritors in order to pay the tax. And because the cash must probably come from the business itself, this in a number of cases is likely to lead to the end or sale of the business simply to fund the tax. This in turn could lead to a business mentality of estate planning for death, not investment in the business. On any basis so far elucidated, this looks like an ideological tax not a necessary one, with negative consequences of great significance, and little tax revenue benefit. Again, anyone building a business for themselves will hardly find this an incentive to do so if part of their motivation is to leave a legacy business for, say, their children. It is perhaps true to say that most people who are ambitious for themselves and their family resent taxes they see as unfairly weighted.
This is of course to ignore other legislation, such as in the last budget or concerning employment rights which, business owners and experts commonly say, including the Governor of the Bank of England, will reduce enthusiasm to employ more people and add materially to the cost of running a business, and lead to price increases for the consumer. And so, growth is in fact being discouraged.
Nearly everything referred to above by way of Government disincentives to releasing the “animal spirits” in the private sector has yet to come into effect. That means it is easy to change or even reverse. Given the newly announced Government enthusiasm for the potential of the UK, and its newfound voice to talk it up not down, should it not have the courage to change and reflect their words with actions?
EMBRACING RISK
We were promised too an efficiency drive in the public sector: for example, a bonfire of consultants taken on by Government departments, and yet in the 6 months to mid-January 2025 apparently 1,979 consultancy contracts were awarded costing £2.17billion, while in the same period (2023-2024) 1,872 were awarded costing £1.29billion. And from July to December 2024 new Quangos were created at the rate of one a week. This approach needs to change to reflect government promises. But perhaps the obsession with consulting third parties and the resort to Quango creation all reflect an attitude to risk which is too cautious and show a reluctance to take responsibility and admit mistakes. Following consultants’ advice and abrogating power to another institutional body relieve the Government of responsibility for decisions.
The promise to reduce regulation and so encourage growth can only be fulfilled by accepting a sensible but braver level of risk-taking. But it is at best counter-intuitive that tearing up regulation has meant Government creating a new office, more bureaucracy, called the Regulatory Innovation Office, with its own new employees and governance. People who run private businesses thrive by taking and overcoming risks: perhaps we should fear that Government leaders do not understand that world as the Prime Minister and the Chancellor have never worked in such an environment . And the EU which so dominated the approach of our Civil Service for 40 years itself has a principle called “the precautionary principle” where limiting risk is a primary aim, not just a factor to account for in decision-making: perhaps that influence still prevails.
COURAGE AND ENCOURAGEMENT
To revive “animal spirits” in work, to encourage growth in the UK, to incentivise the brightest and the best, as well as all the rest, and to embolden people to be daring requires courage. The courage in Government to acknowledge mistakes, to let real pragmatism overrule dogma and to set people free of red tape and overbearing regulation requires courage because, if they do these things, there will likely be unintended damage. But risk taking comes with a price. Encouragement to take a risk will only work if risk brings reward. The ability to assess risk sensibly and the courage to take risk could be the qualities which ultimately rejuvenate the immense potential of the people of the UK: The Government should set an example.
See also:
Nannying, A Road to Bankruptcy
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