There is no good tax rise for the Conservatives

The Government could increase revenues, but only through measures that are politically toxic

At some stage, quite soon, Boris Johnson will have to make up his mind; is Britain going to be a big state, high tax economy on the European model, or a relatively low tax jurisdiction in the Thatcherite tradition, with a pared down state to match?

It would plainly be nice to have both – a combination of low tax and big state – but optimist though he is, the Prime Minister must know that in the real world there can be no such thing. Eventually, spending has to be brought into line with tax revenues. Taxes have to rise, or spending has to fall.

For the moment, however, confusion reigns. Other than a relatively clean break Brexit, it is indeed hard to know what this new Tory administration wants to do on anything, and even on Brexit we’ve yet to learn what the new freedoms might be used for.

Admittedly, today’s confusion is in part explained by current events, and is therefore understandable. The pandemic has necessitated a huge rise in public spending; economic collapse has also hammered tax revenues.

Some of the consequent record deficit will naturally disappear as the economy returns to “normal”, but a fair amount will persist. Even before Covid, the lid was being taken off spending. As the Government is about to find out, it’s easy to ramp up spending, but hard to take it away again.

Reimposing fiscal discipline on the nation after a bad recession is possibly the hardest thing democratically elected governments ever have to do. But for this one, with multiple different Brexit voting constituencies to answer to, it’s going to be particularly difficult.

While I was away on holiday in July, the Government announced two “calls for evidence” on tax policy, one on capital gains tax (CGT) and the other on business rates. Rightly or wrongly, these were widely seen as an early warning of sweeping tax rises to come. But they are also merely stumbling around in the foothills of the tax system. Whatever the Government does to adjust and reform these two revenue streams, it is unlikely to raise a great deal of extra money.

Rishi Sunak, the Chancellor, has form when it comes to CGT. Without warning and with immediate effect, he has already substantially reduced “entrepreneurs relief ”. No doubt the tax, with its myriad exemptions and allowances, could be cleaned up a bit.

But to go further, and realign capital gains with income tax rates, would very likely prove counterproductive, deterring much realisation of gains and driving finance offshore. Besides, the only plausible way of raising serious quantities of extra revenue from CGT would be to tax gains on first homes. It is hard to imagine a Tory chancellor doing that.

The same goes for more generalised wealth taxes. Even Denis Healey backed away from them after analysis showed that the administrative costs would probably exceed the revenue raised. Again, the only way of generating meaningful amounts from wealth taxes is to tax the UK’S biggest store of wealth – its housing stock.

As for business rates, the review is more aimed at finding alternatives to or reforming an already broken and unfair system of local government funding – in any case seemingly made almost wholly redundant by the leap in home shopping and working – than raising additional revenues. Already, this form of taxation has risen steeply relative to everything else.

The brutal truth is that there are only four sources of Government revenue big enough to make a significant difference, and one of those – corporation tax – is a distant fourth. Tinkering around with the rest might in aggregate raise worthwhile money, I suppose, but it would also alienate an awful lot of souls, and potentially slap the brakes on economic growth just when we need it most.

Ultimately, then, it comes down to the big three – income tax, national insurance and VAT.

It would be madness to raise any of these taxes in current circumstances, or even for the Government to signal that it intends to do so once the economy has recovered.

That the Government committed in its election manifesto not to do this is one reason, but also beside the point. Never mind a second wave, the even more certain way to stall today’s nascent recovery is to start squeezing before economic normality has been restored. Even then, for a Tory government to be significantly raising the tax burden would politically be a very hard sell.

Mr Sunak finds himself classically caught between a rock and a hard place. Ultra low interest rates have allowed the politicians a false sense of security. When money is free, why worry about the deficit? But some time soon, he’s going to have to.

Low interest rates are only sustainable as long as markets are confident that the value of the government bonds they are buying is not going to be eroded by credit worries or inflation. This depends in part on having a credible fiscal strategy. Taxes or spending? Perhaps best if the Tories first make up their minds what they stand for.

Jeremy Warner on Twitter @jeremywarneruk; read more at telegraph.co.uk/opinion