ALEX BRUMMER: Chancellor Rishi Sunak expected to increase tax hikes


ALEX BRUMMER: Sunak should increase tax hikes because hammering growth with a looming 70s-style energy crisis is madhouse economics

  • Revenue boosting plan started a year ago with corporate tax announcement
  • Followed by unveiling of 1.25% NHS tax on employers and employees
  • Then freezing of allowances in the November budget

Rishi Sunak should by now be used to navigating Britain through the economic crisis. As a virtual unknown promoted to chancellor when Sajid Javid bailed out after the Downing Street infighting, Sunak is considered to have done well enough to be a candidate to succeed Boris Johnson if and when the latter is removed from office.

As Covid unfolded, Sunak willfully used the government’s balance sheet to avert economic catastrophe, spending some £410billion of public funds.

It worked and averted the unemployment catastrophe projected by the Bank of England at the start of the pandemic and prevented widespread corporate scarring.

Raise the hike: Chancellor Rishi Sunak expected to scrap tax hikes in current climate

There were mistakes, including trusting the disappointing UK merchant bank to be the arbiter of loan schemes leading to a £4.3bn write-off by the Treasury. Close scrutiny led to the angry resignation of Treasury Secretary Lord Agnew in January this year over the scale of fraudulent lending.

No sooner had Britain declared the pandemic was all but over, and the Chancellor faces a new urgency in Russia’s ruthless assault on Ukraine. The impact on inflation, economic output and global financial stability is every bit as daunting as Covid. Shifting geopolitical tectonic plates have already caused Germany to flip-flop on energy policy and defense spending.

It is in this tortuous context that the Chancellor will deliver her Spring Statement next Wednesday (the full budget arrives in November).

Sunak’s plan, as the UK emerged from Covid, was to back the Conservative brand of fiscal prudence. He sought to bake that into the cake through the unfair freeze of tax thresholds, the new health and social care levy and the reversal of George Osborne’s major corporate tax cuts.

The Institute for Fiscal Studies calculates that this tax windfall is equivalent to 2% of national production by 2024-25. In historical terms, this is the biggest fiscal impact since Gordon Brown was chancellor.

Sunak’s narrative has long been that if he put the fiscal house in order now, there would be money for the pre-election tax cuts. It might be advisable to think back to the advice of the former head of the Office of Budget Responsibility, Robert Chote.

In Commons testimony two years ago, after Sunak unveiled his first Covid package, Chote pointed out that the budget deficit had risen to 20% of national output during World War II, and that was not the moment to be “disgusted” on the loan.

That advice couldn’t be more relevant ahead of next week’s statement. The Chancellor’s campaign to boost revenue began a year ago when he pre-announced a rise in corporation tax for the first time in 47 years from 2023. This was followed by the unveiling of the levy NHS cut to 1.25% on employers and employees (raising £14bn in the first year) last September followed by the freezing of benefits in the November budget.

Each of these tax increases is anti-conservative in the extreme in that it harms business, thwarts household aspirations to move to higher tax brackets and, in the case of the national insurance, is an attack on jobs.

All run counter to the vision of the UK as a low-tax economy passed in Brexit.

As the economist John Maynard Keynes wrote: “When the facts change, I change.

The war in Ukraine has radically changed the situation. Inflation, which was already heading towards 8 percent, is now expected to reach double digits in the fall. Instead of the robust recovery in production this year, forecasters are busy downgrading.

There are fears of a recession in Germany and this week the Paris-based OECD dropped a full point from its forecast for global growth of 4.5% this year.

As the prices of oil, gas, wheat and other commodities soar, the risks of stagflation or even collapse increase.

The ruling Chancellor’s stellar reputation stems from his willingness to spend big in the pandemic.

The recovery has already resulted in an increase in income tax and VAT receipts, as a bonus for public finances. The Spring Statement was intended to be all about productivity, boosting R&D and improving learning.

All of this is vital. But hammering on growth and real incomes now, when a European democracy is being reduced to rubble and a 1970s-style energy crisis looms, is the economics of crazy’s house.

Sunak should increase the hikes.

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