Does anyone still believe in low taxes?

23 March 2022

1:25 AM

23 March 2022

1:25 AM

Speculation over which taxes the Chancellor will slash or, more likely, hike at tomorrow’s spring statement seems to have settled on two areas. First, a cut to fuel duty and, second, an increase in National Insurance thresholds, a way of tweaking the already announced tax hike to reduce the burden on the poorest.

On the first point, a cut in fuel duty could cost the Treasury around £2.5 billion a year (although the government is unlikely to get much political credit if Sunak does go down this route given how quickly energy costs are rising). On the second, it looks almost certain that the Chancellor will proceed with his planned 2.5 point rise in NI contributions, despite today’s data revealing borrowing is on track to undershoot by about £26 billion. The NI hike is expected to raise £12 billion per year – meaning the British public will be paying more tax when Sunak sits down at the despatch box than we were when he stood up.

Amid a cabinet rift over the rise back in January, the Chancellor insisted it would be irresponsible to ‘duck difficult decisions’ ahead of the planned increase. But the current trajectory isn’t ‘difficult’ any more than it is responsible. Borrowing for day-to-day spending is reckless. But a bolder government would rethink its strategy of narrowing the deficit through tax rises and commit to bringing down the country’s tax bill while reducing public spending, which has spiralled out of control during the pandemic. A serious Conservative government would, for instance, cut ‘sin taxes,’ scrap the green levies which make up around a quarter of our energy bills, and abandon the National Insurance tax increase.

When Sunak was confronted this weekend with a graph showing how much taxes had been raised during his tenure compared to his predecessors, he blamed the pandemic for his record. Using crises to shirk responsibility or difficult choices has become the Johnson government’s MO. The war in Ukraine has been blamed for soaring energy costs – even though the trend was well underway before Putin’s tanks crossed the border. Lockdowns may put our ‘low-tax’ Chancellor in a tight squeeze, but the government has long been living far beyond the taxpayer contributions it relies on.

While Gordon Brown dramatically increased the role of government in economic life, the Tories – with their 12 years in power – have done nothing to reverse it. Instead, they have resigned themselves to governing in a New Labour world. Brown may have promoted a huge system of income redistribution that led to most families facing a loss of 70p in every extra pound earned, but the Tories are equally blind to how government intervention raises costs for normal people. This has been laid bare in all the mini-Budget hints and rumours.

Politicians appear to have forgotten the negative relationship between taxation and spending on the one hand and productivity and economic growth on the other. They talk of double and triple ‘whammies’ in the cost of living crisis – failing to mention that the biggest cost of living to most people is the tax they pay. But as we lurch from one catastrophe to the next, tough decisions get harder to make. Brexit looks like nothing compared to what’s come since. We’ve spent £400 billion on mitigating the economic consequences of consecutive lockdowns. And though Sunak has seemingly ruled out any increase in defence spending, the fact remains that we may not be able to rely on the ‘peace dividend’ for much longer. The UK spends just 2.2 per cent of GDP on defence, down from 7 per cent in 1963.

If government does not radically deregulate in areas like planning and the labour market, while taking an axe to our tax code, we will see a continual squeeze on living standards – no matter how many rabbits Sunak tries to pull out of his hat. The Chancellor claims that he wants to lower taxes, yet he is set to add further to the 70-year-high tax burden. This will not only worsen the current cost-of-living crisis but will hamper economic growth by reducing incentives for work, saving and entrepreneurship. Milton Friedman popularised the adage ‘there is no such thing as a free lunch’. In the end, we all pay.

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