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Labour’s tax increases are pushing workers and investors abroad.
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The Editorial Board
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The U.K. government’s borrowing continued to run ahead of projections in October, a deterioration in its finances that it will aim to correct with tax rises and some spending cuts in its annual budget statement next week.
The Office for National Statistics on Friday said the government borrowed 17.4 billion pounds ($22.75 billion) in October, bringing the total for the first seven months of the fiscal year to 116.8 billion pounds, 9.9 billion pounds above the amount projected by the Office for Budget Responsibility in its March forecasts.
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Paul Hannon
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Britain’s stock and bond markets flopped Friday morning on new evidence that the country’s Labour Party leadership doesn’t have a clue what to do about the economy or budget. Add this to the list of welfare-state cautionary tales out of Europe.
At one point Friday morning, the yield on the benchmark 10-year government bond, or gilt, had risen 11 basis points to 4.55%. The main London stock index dipped nearly 2%, and the pound fell. This was in response to a Financial Times report Thursday night that Chancellor of the Exchequer Rachel Reeves is abandoning plans to increase income-tax rates in her budget plan this month.
This sounds like good news. but investors interpreted it as a sign that Ms. Reeves and her boss, Prime Minister Keir Starmer, have run out of politically viable ways to balance the government budget—which is true. Estimates of the budget “black hole” Ms. Reeves needs to fill range up to £30 billion per year—the gap between likely spending and revenue if current policies stay the same.
An attempt over the summer to cut some particularly generous welfare benefits collapsed amid a rebellion from Labour backbenchers in Parliament, putting welfare reform off the table. Mr. Starmer is rightly under pressure to increase defense spending. Labour’s promises of economic growth via public “investment” translate mainly to pay increases for government workers.
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The Editorial Board
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GDP rose 0.1% in the third quarter, compared with 0.3% in the second, amid uncertainty about the government’s budget and the impact of a cyberattack on a major carmaker.
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Don Nico Forbes
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LONDON—The U.K. has long been torn between two mutually exclusive desires: Voters want European levels of welfare with American levels of taxation.
By accident or design, that debate is slowly being resolved in the direction of higher taxes, as Britain’s Labour government prepares its second major tax increase in as many years.
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David Luhnow
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OTTAWA—Canada said Tuesday it intends to run wider deficits to finance spending and tax measures aimed at unleashing the massive private-sector investments the economy needs to rebuild amid a protectionist U.S.
To offset some of the elevated costs, Prime Minister Mark Carney’s government said it would cut the size of the federal public-sector workforce by about 5%, or 16,000 jobs.
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Paul Vieira
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The U.K. government’s upcoming budget will focus on lowering inflation and paving the way for the Bank of England to lower its key interest rate, treasury chief Rachel Reeves said Tuesday.
In a speech, Reeves also said the Nov. 26 budget would aim to lower the government’s debt, but also protect public services. She didn’t rule out a rise in taxes on households, which many economists see as the only option left to the government if it is to achieve its other goals.
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Paul Hannon
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The European debt crisis of the early 2010s created an image of a continent cleaved in two: The fiscally responsible core countries led by Germany versus the spendthrift southern periphery of Portugal, Italy, Greece and Spain—disdainfully dubbed PIGS.
Nowadays, there has been a role reversal. Europe’s three biggest economies are stuck in a cycle of weak growth, leading to widening budget deficits. France is the epicenter of this shift and remains mired in a budget and political crisis, while the U.K. is eyeing tax hikes to try to narrow the gap and avoid spooking markets. Famously frugal Germany and the Netherlands are taking on debt, albeit from lower levels.
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Chelsey Dulaney
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GYEONGJU, South Korea—Amid the pageantry and backslapping, President Trump’s weeklong Asian swing drew attention to a sour point for allies: The U.S. demand that they spend more to respond to a rising threat of Chinese aggression.
Washington first pressured Europeans to boost their military budgets shortly after Trump took office in January. That push ultimately proved successful, with many allies pledging to increase spending.
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WARSAW—For more than a decade, Poland has prepared for the worst-case scenario: becoming the front line in a war between Russia and the West.
With an eye on growing Russian aggression in Europe, Warsaw’s military planners built out the country’s armed forces, turning it last year into the largest European military in the North Atlantic Treaty Organization. It ramped up military spending to 4.7% of gross domestic product this year—the highest in the alliance. A multibillion-dollar spending spree has put Poland among the biggest buyers of U.S. weapons.
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Thomas Grove
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The U.K.’s troubled statistics office cut its estimate for net government borrowing by 3 billion pounds ($4.03 billion), a further setback for the agency that has faced criticism from the Bank of England and lawmakers.
The Office for National Statistics said the U.K. government’s tax authority, HM Revenue and Customs, informed it of an error in value-added tax receipts data it supplied to the data agency.
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Ed Frankl
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Where do they think they are—Italy? France on Monday lost another Prime Minister—the fifth in two years—as Paris burns through senior political leaders at the pace you used to see in Rome. Don’t expect the revolving door to slow down any time soon.
The latest victim of political dysfunction à la française is Sébastien Lecornu, who quit after less than a month as PM. He’d come into office promising a “profound break” with the gridlock of the recent past. Then this weekend he introduced a new cabinet stacked with politicians associated with unpopular President Emmanuel Macron. The backlash in the obstreperous legislature prompted his resignation a day later.
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The Editorial Board
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We set out across the Indo-Pacific in August to assess U.S. military readiness and consult with allies. In the Philippines, Palau and Taiwan, we found partners determined to resist Chinese coercion and willing to share the burden.
In Taiwan we spoke with President Lai Ching-tse and senior officials. They understand the gravity of the threat and are responding with urgency to meet it. Mr. Lai has committed to increasing defense spending and mobilizing the public behind a resilience plan.
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Roger Wicker
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Two years ago, Argentines elected the radical libertarian Javier Milei as president with a mandate to fix the country’s chronically high inflation.
The odds didn’t look good. Previous presidents had failed to address one of inflation’s root causes: government deficits. Without access to capital markets, Argentina often turned to the central bank to finance its deficits by printing money. Efforts to rein in spending were stymied by resistance in Congress and by the public.
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[ad_2] Greg Ip
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BOSTON — Backers of the state’s “millionaires tax” are accusing the Healey administration of defying the will of voters by tapping into proceeds from the tax to close out the previous fiscal year budget.
A supplemental budget filed by Gov. Maura Healey aimed at closing out the previous fiscal year budget calls for spending $225 million in “millionaires tax” proceeds to cover costs for grants to child care programs, universal free school meals, transportation service expansions and other items.
But the Massachusetts Teachers Association, a chief proponent of the tax, is blasting the proposal to use the money this way, saying the funding needs should have been covered by other revenue sources.
“Fair Share funds must be used to build upon the existing spending for public education and transportation, and not become dollars lost on balance sheets,” MTA President Max Page said in a statement. “Gov. Healey’s supplemental budget proposal defies the will of the voters and the spirit of Fair Share, which is raising money to grow our public education and transportation systems.”
Voters approved the so-called Fair Share proposal in the 2022 elections, setting a new 4% surtax on people with incomes above $1 million a year. The state collected more than $2.1 billion from the tax in the previous year, exceeding projections by budget writers.
A spokesman for the state’s Executive Office of Administration and Finance defended the governor’s proposal, saying the spending is in line with the intent of the voter-approved tax and the state budget.
“Our administration has consistently demonstrated our commitment to fulfilling the will of the voters who approved the Fair Share surtax to support our education and transportation systems,” the agency said in a statement. “The supplemental budget filed by the Governor maintains that commitment by proposing to use a limited amount of surplus surtax for education and transportation programs like universal school meals and child care provider grants.”
The approach, the agency said, “aligns with how surtax revenue was budgeted in Fiscal Year 2025 and is necessary to close Fiscal Year 2024 in balance.”
Healey’s $714 million supplemental spending plan, which requires legislative approval, seeks to close funding gaps for public health, substance use treatment and education, and fund collective bargaining agreements with labor unions.
It also calls for overhauling how Massachusetts approves renewable energy infrastructure projects, which has also drawn criticism from lawmakers who view it as an end-run around a stalled clean energy bill.
The issue of how billions of dollars in proceeds from the tax will be spent by the state government was a key issue in the debate over the proposal.
A chief criticism was claims by tax proponents that the money will be devoted exclusively to transportation and education spending were misleading.
A 2022 report by Tufts University’s Center for State Policy Analysis ahead of the tax’s approval by voters warned that while the plan clearly stated the money must be devoted to education and transportation, not all the surtax revenue is likely to be spent in those areas.
“The problem is fungibility, or the ease with which lawmakers can shift money between programs,” the report’s authors wrote. “There is nothing illegal or untoward about this approach; it’s a common part of legislative horse-trading.”
The report estimates that for every dollar raised by the surtax, spending on the stated earmarks is likely to increase by 30 cents to 70 cents, with the remainder being “diverted to other areas of the budget,” they wrote.
It also noted that revenue from the tax would be “highly volatile” and is likely to rise or fall sharply, depending on the economic conditions. The number of people paying the tax will increase gradually over time, the report noted.
Supporters say taxing the rich means more money to improve neglected public schools, expand child care options, and fix potholed roads and crumbling bridges.
Opponents argue the tax is hurting businesses and driving away corporate investment and job creators, while putting a drag on the state’s economy as it recovers from residual impacts of the pandemic.
Christian M. Wade covers the Massachusetts Statehouse for North of Boston Media Group’s newspapers and websites. Email him at cwade@cnhinews.com.
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By Christian M. Wade | Statehouse Reporter
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Small businesses in sectors like software and manufacturing are panicking over the expiration of a critical tax deduction that they say could lead to mass layoffs and business closures, unless Congress acts quickly to amend the law.
“This is a life-and-death scenario for small software companies,” Michelle Hansen, co-founder of the geocoding company Geocodio, told MarketWatch.
The tax change that Hansen and other software executives are taking issue with was signed into law by President Trump in 2017, as part of a larger tax overhaul that slashed the top corporate tax rate from 35% to 21%.
But in order to satisfy Senate budget rules and pass the law with only Republican votes, the bill could not increase the budget deficit over a 10-year window.
So lawmakers included a provision that, beginning in 2022, drastically reduced how much research-and-development spending a business could deduct from their annual revenue to determine taxable income.
The change penalizes certain industries like software and information technology — where engineer salaries are often classified as R&D expenses — as well as manufacturing and pharmaceuticals
IHE.
IntervalZero CEO Jeff Hibbard, whose Massachusetts-based company designs and sells software for installation on precision machines like semiconductor manufacturers, told MarketWatch that he has had to tap into company savings for the past several years in order to avoid laying off engineers.
He said that his firm brings in about $9 million in revenue annually with expenses of $8 million — but 60% of those expenses come in the form of engineer salaries, which can only be deducted from taxable income over a five-year period because the IRS treats it as R&D.
He said that after taxes consumed all his profits in 2022, he had to pay an additional $800,000 to Uncle Sam, and an additional $600,000 for the 2023 tax year.
“We’ve had to do a hiring freeze and postpone projects” in a cutthroat industry where technology progresses rapidly, Hibbard said. “We’ve been in existence for 15 years. For the first 14, we always hired additional people. Now we have a hiring and salary freeze.”
The House of Representatives voted last week 357-70 to restore full expensing for R&D as part of a $79 billion tax package that boosted the child tax credit and extended other business tax breaks.
The bill now heads to the Senate, which already has its hands full debating immigration and national-security issues, and analysts say election-year politics could thwart its passage in 2024.
Henrietta Treyz, director of economic-policy research at Veda Partners, gave just a 10% chance of the bill passing the Senate in a recent note to clients.
“This year’s effort to pass a tax package has been more robust than the effort we saw in 2022 and 2023,” she wrote. Treyz added, however, that “the competing need to pass border reform and Ukraine/Israel aid, and general dysfunction in Washington keep us pessimistic that we’ll see a bipartisan economic-stimulus package come out of Congress this year.”
On top of Republicans not wanting to give President Joe Biden a victory that would provide tax relief for businesses and families, Senate Republicans could decide to drag their feet on the bill in the hope that they’ll retake the chamber next year and can play a bigger role in the process, according to Owen Tedford, policy analyst at Beacon Policy Advisors.
“The critical member to watch is Senator Mike Crapo [of Idaho], the top Republican on the Senate Finance Committee,” Tedford wrote. “Crapo has not outright opposed the bill but has raised policy concerns and has expressed a desire to have a chance to amend it.”
Political considerations may be dictating the bill’s fate in Washington — but some business owners fear they don’t have the wherewithal to wait until next year for the problem to be fixed.
Benjamin Bengfort, co-founder and CEO of Iowa-based software firm Rotational Labs, told MarketWatch that he had to lay off workers last year after his 2022 tax bill rose by 438%.
He noted that even demand for his products has taken a hit because of the change in the law, because his services can count as an R&D expense for his customers, too.
“So it is [between] a rock and a hard place for us, no matter how you look at it,” Bengfort said. “This is an existential threat for software engineering companies.”
Andrew Keshner contributed.
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