ALEX BRUMMER: To hammer growth and real incomes with war in Ukraine and a 1970s-style energy crisis looming is the economics of the madhouse – Chancellor should spike tax hikes
Rishi Sunak should be used to navigating Britain through economic crisis by now. As a virtual unknown promoted to Chancellor when Sajid Javid bailed out after Downing Street infighting, Sunak is seen as having done well enough to be a contender to succeed Boris Johnson if and when the latter is prised out of office.
As Covid unfolded, Sunak made willing use of the Government’s balance sheet to avoid an economic catastrophe, spending some £410billion of taxpayer funds.
It worked and avoided the unemployment disaster projected by the Bank of England early in the pandemic and prevented the widespread scarring to business.
Spike the hike: Chancellor Rishi Sunak should ditch tax rises in the current climate
There were mistakes, not least trusting the underwhelming British Business Bank to be the referee for loan schemes leading to a £4.3bn write-off by the Treasury. Poor scrutiny led to the angry resignation of Treasury minister Lord Agnew in January of this year over the scale of fraudulent loans.
No sooner had Britain declared the pandemic to be all but over, and the Chancellor faces a new emergency in the callous Russian assault on Ukraine. The impact on inflation, economic output and global financial stability is every bit as intimidating as Covid. The shift in the geo-political tectonic plates has already led Germany to make screeching U-turns on energy policy and defence spending.
It is against this tortuous background that the Chancellor will next Wednesday deliver his Spring Statement (the full budget comes in November).
Sunak’s plan, as the UK emerged from Covid, was to underpin the Tory brand of fiscal prudence. He sought to bake this in the cake through the iniquitous freeze on tax thresholds, the new Health and Social Care levy and the reversal of George Osborne’s headline cuts in corporation tax.
The Institute for Fiscal Studies calculates that this revenue-raising bonanza is the equivalent of 2 per cent of national output by 2024-25. In historic terms, it is the biggest tax hit since Gordon Brown was Chancellor.
The narrative for Sunak has long been if he gets the public finances back in order now, there will cash for pre-election tax cuts. He might be advised to think back to the advice of former Office for Budget Responsibility chief Robert Chote.
In testimony to the Commons two years ago, after Sunak had unveiled his first Covid package, Chote pointed out that the budget deficit rose to 20 per cent of national output in the Second World War, and it was not the time to be ‘squeamish’ about borrowing.
That advice could not be more relevant ahead of next week’s statement. The Chancellor’s campaign to lift revenues began a year ago when he pre-announced higher corporation taxes for the first time in 47 years starting in 2023. This was followed by the unveiling of the NHS levy of 1.25 per cent on employers and employees (raising £14billion in its first year) last September followed by the freezing of allowances in the November budget.
Each of these tax increases is un-Tory in the extreme in that they hurt enterprise, frustrate aspiration for households moved into higher tax bands and in the case of the national insurance rise, is an attack on jobs.
All fly in the face of vision of the UK as a low-tax economy voted for in Brexit.
As economist John Maynard Keynes noted: ‘When the facts change, I change.’
The war in Ukraine has changed matters dramatically. Inflation, already heading towards 8 per cent, is now seen as hitting double figures in the autumn. Instead of the robust recovery in output this year, forecasters are busy downgrading.
There are fears of recession in Germany and this week the Paris-based OECD knocked a full point of its world growth forecast of 4.5 per cent this year.
As oil, gas, wheat and other commodity prices soar, so the odds on stagflation if not slump increase.
The Chancellor’s stellar reputation in office stems from his willingness to spend big in the pandemic.
The recovery has already delivered higher income tax and VAT receipts in a bonus for the public finances. The Spring Statement was intended to be all about productivity, boosting R&D and better apprenticeships.
That is all vital. But to hammer growth and real incomes at present when a European democracy is being reduced to rubble and a 1970s-style energy crisis looms is the economics of the madhouse.
Sunak should spike the hikes.