No tax reduction for two years. Over the past few days, Boris Johnson, Rishi Sunak and Michael Gove have all given the message that working people will have to wait. They fear that cutting taxes will encourage spending and worsen inflation. But this thinking ignores the second, even more serious economic threat we face: low growth combined with high inflation. Already, we are on the brink of recession. That should worry the government just as much as the cost of living, rightly so.
The growth rate has plummeted as people have less and less to spend. I don’t know what happened to the Treasury model, but it was quite predictable, predicted by a number of conservative politicians and economists. What is also predictable is that with a declining growth rate, UK productivity growth will also come to a halt.
Young readers won’t remember the 1970s when we experienced stagflation. It was devilishly difficult to break out of this dark cycle, and it cast a shadow over the country for an entire decade. We simply cannot allow this to happen again. This will have terrible costs for the economy and voters will not bear it for long.
Yet amid runaway inflation and increasingly disruptive strikes, ministers seem to think there is nothing they can do to break the cycle. After pumping cash into the economy during the pandemic, they’re scared to act as the chicken comes home to roost. This will eventually leave millions of people wondering: what happened to taking back control?
Rather than lash out to make the most of Brexit freedoms, this Conservative cabinet is about to throw in the towel and opt for the failed left-wing economic model, with endless government support and a excessive ticket printing. Indeed, the government is now taking more money from people’s paychecks than at any time since the 1950s. More money in fact than any Conservative government has ever taken.
Last year’s decision to freeze income tax thresholds and increase National Insurance contributions means a family with two median incomes is already paying over £200 more to the Treasury. With tax thresholds frozen, that number will only grow – and it comes on top of huge increases in energy bills, food costs and oil prices.
Such an approach risks encouraging cost inflation, allowing unions to profit from reductions in the real incomes of their members, as we can already see in the railways.
It doesn’t have to be like that. In fact, there are many conservative solutions to the problems we face. First, the Bank of England should stick to its primary mission: controlling inflation by controlling the money supply. That’s his job and that’s what Rishi Sunak should tell him to do.
At the same time, the Treasury’s job is to use fiscal policy levers to encourage investment, grow the economy, and ease the strain on families, as Nigel Lawson did. He could scrap his ill-advised hike in National Insurance contributions, scrap VAT on fuel to help rein in crippling prices at the pump and reduce green levies currently being added to people’s already sky-high energy bills.
And since productivity growth is essential to get us out of the hole, we must do everything we can to increase investment. By predicting corporate tax year increases in advance, the Treasury has maximized the damage of tax increases, affecting current and future investments. That is why he should announce corporate tax cuts now.
All of this could be done without breaking the bank. But we have to move quickly. Two and a half years into Boris Johnson’s term in office, to use a quote from Churchill, it is time “to act today”.