IN the UK, Conservative party campaign ads often warn of “tax bombshells” about to be dropped by a profligate Labour party. Yet allies of Chancellor Rishi Sunak recently briefed the media about a Tory “tax bombshell” to pay for the billions splurged by the government during the Covid-19 crisis.
An explosion duly followed in the ranks of his party.
Sunak backtracked fast. There would be no “horror show” of taxes in November’s budget, he assured fellow MPs. For the chancellor, the favoured child of a luckless government, this was a serious reality check.
He is one of the few Cabinet ministers to emerge from the crisis with an enhanced reputation.
The billions he has spent on a generous furlough programme for workers and an ingenious scheme to bribe fearful consumers into dining out have been widely popular.
A total of £192bil (US$245bil) in fiscal support buys you a lot of friends, it turns out.
But in politics, memories are short. Higher taxes might well choke off a nascent economic recovery. A former leadership candidate, David Davis, who often argues an independent line, put it to me bluntly: “It would be stark, raving mad.” Instead of hiking taxes, Sunak should focus on restraining government spending to areas that won’t damage growth.
Take the job retention program, for example. Some economists predict that Britain is heading for an unemployment crisis “of Biblical proportions” if the furlough scheme expires on schedule at the end of October.
Nobel-winning economist Chris Pissarides of the London School of Economics warned that ending the scheme would be “one of the biggest policy mistakes in modern British history.” But the current regime is vulnerable to fraud. Sunak would be wise to replace it with a cheaper, targeted programme.It seems like only yesterday that Conservative MPs were jeering at the last left-wing Labour opposition leader, Jeremy Corbyn, for believing in a “magic money tree” of state spending. Nowadays the Tories appear to have abandoned fiscal restraint altogether.
Invoking Churchillian rhetoric, they see the pandemic as a wartime-like emergency that demands exceptional measures and stratospheric government borrowing. Their instincts in this case are largely correct.
But they also support large spending increases on health, measures to “level up” conditions in “left-behind Britain” and headline-hunting infrastructure projects. The only outlay of which the dominant right seems to disapprove is the commitment to 0.7% of GDP for foreign aid.
Someone has to urge restraint. That someone is traditionally the chancellor.
Sunak is not “mad.” He is rightly concerned that his colleagues have given up all fiscal discipline. Sound finance is supposed to be a core Conservative virtue. Sooner or later, taxes must rise or spending must fall to service the country’s debt.Where does his leader stand? “Boris is emotionally against tax rises, ” says one Conservative veteran who has little faith in the prime minister’s grasp of economics. But Johnson loves big-ticket spending: His election manifesto promised 50,000 more nurses and 20,000 extra police. As London mayor, he committed large sums to a Garden Bridge that never got built and an airport alternative that proved to be a pie in the sky.
However, he knows that median earners would be the victims of most tax rises, and these were the voters who gifted him his electoral triumph last year. Squeezing a few rich folks (who can juggle their tax codes or flee abroad) won’t make up the numbers.
At the beginning of the pandemic, a one-off increase in public spending didn’t trouble the Treasury. The extra borrowing would be temporary and the impact of Covid would be short. Now the Office of Budget Responsibility estimates that by the time of the next election in 2025, the budget deficit will represent 5% of GDP. Before the pandemic, it was 0.6%. An ageing population will also mean more calls on the public purse and diminished revenues.
Other fears lurk in the collective mind of the fiscal conservatives. If interest rates are hiked from 0.2% to 1%, government borrowing would balloon by £40bil a year, according to Treasury stress tests. Although a majority of economists thinks the danger of recurring inflation is exaggerated, many concede that the government’s books will need to be rebalanced in the medium term.
The popular press, which keeps the prime minister on life support despite his gaffes, also howled down Sunak’s talk of tax rises. Being only human, Johnson is unlikely to shed a tear at seeing a suddenly popular chancellor taken down a notch or two.
After all, he dumped Sunak’s predecessor within weeks for failing to bend the knee. Yes, it would be careless to lose another, but accidents do happen on the banana skins of taxation rows.
Still, some planning for future parsimony is only prudent. Sunak could ensure that the Treasury’s three-year public spending review, which began in 2019, is more than a cosmetic exercise.
Most reputable think tanks have been begging the Tories to copy Canada’s overhaul of the state in the 1990s, which brought down the deficit and created surpluses.
In the meantime, a gradualist approach to reducing the deficit is good politics and economics. Even (the few) Brexit-supporting economists fear a short-term shock when the UK leaves the single market in January, especially if trade talks with Brussels run into the sand.
An ambitious chancellor with an eye on the biggest job of all won’t want to be saddled with a reputation for tax hikes that are seen to slow down recovery.
Sunak should channel his St. Augustine: “Lord give me higher taxes and spending cuts, but not yet.” — Bloomberg
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Martin Ivens was editor of the Sunday Times from 2013 to 2020 and was formerly its chief political commentator. The views are the writer’s own
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