No tax cuts for two years. In the last 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 make inflation worse. But this thinking ignores the second, even more dire 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 does.
The growth rate has slumped as people have less and less to spend. I do not know what happened to the Treasury model, but this was entirely predictable, foreseen by a number of Conservative politicians and economists. What is also predictable is that, with a falling growth rate, Britain’s productivity growth will also be halted.
Younger readers will not remember the 1970s, when we had stagflation. It was fiendishly difficult to get out of that grim cycle, and it cast a dark shadow over the country for an entire decade. We simply cannot allow it to happen again. It will have terrible costs for the economy, and voters will not put up with it for long.
Yet, amid surging inflation and increasingly disruptive strike action, ministers seem to think that there is nothing they can do to break the cycle. Having pumped money into the economy during the pandemic, they are afraid to act as the chicken comes home to roost. It will eventually leave millions asking: whatever happened to taking back control?
Rather than unleashing enterprise to make the best of Brexit freedoms, this Conservative Cabinet is coming close to throwing in the towel and opting for the failed Left-wing model of economics, with endless government support and excessive money-printing. Indeed, the Government is now taking more money out of people’s paychecks than at any time since the 1950s. More money in fact than has been taken by any Conservative government ever.
Last year’s decision to freeze income tax thresholds and raise National Insurance contributions means that a family with two median earners is already paying over £200 more to the Treasury. With the freeze in tax thresholds, this number will only keep growing – and it comes on top of enormous rises in energy bills, food costs and petrol prices.
Such an approach risks empowering cost-push inflation, allowing trade unions to take advantage of cuts to their members’ real incomes, as we can already see happening on the railways.
It need not be like this. There are in fact plenty of Conservative solutions to the problems we face. First, the Bank of England should stick to its primary remit: controlling inflation by controlling the money supply. That is its job and that is what Rishi Sunak should tell it to do.
At the same time, the job of the Treasury is to use the levers of fiscal policy to encourage investment, grow the economy, and alleviate the pressures on families, as Nigel Lawson did. It could scrap its ill-advised hike in National Insurance contributions, scrap VAT on fuel to help bring under control the crippling prices at the pumps, and reduce the green levies currently added to people’s already eye-watering energy bills.
And since productivity growth is key to getting us out of the hole, we must do everything possible to increase investment. By forecasting increases in corporation tax years in advance, the Treasury has maximised the damage of the tax rises, hitting investment now and in the future. That’s why it should announce cuts to corporation tax now.
All of this could be done without breaking the bank. But we have to move with speed. Two and a half years into Boris Johnson’s premiership, to coin a Churchillian quote, it’s time for “action this day”.