Sunak must not turn into a Mr Butskell
Last year’s Budget was about getting us through the crisis; Wednesday’s will decide what kind of country we are to be after it. We know that the Chancellor intends to be honest with the voters about the scale of the deficit, which makes sense, and that he and the PM favour a private-sector led recovery. This, logically, should necessitate a smaller but more efficient state, especially given that our tax burden was already at its highest level since 1951 even before the pandemic.
Tragically, we are likely to end up with the exact opposite: a series of tax increases starting on Wednesday, with more to be floated in three weeks’ time, on “tax day”, and yet more raids later in the year. Instead of explaining to the voters that spending levels are too high, the Tories have decided instead that the problem is insufficient tax receipts. Fiscal conservatism is being reinvented into a pro-tax philosophy, a devastating development, the consequences of which will be felt for years to come.
When it comes to the culture wars, Brexit, defence and crime, the Tories have moved to the “Right”, which is hugely refreshing; but on economics, they have embraced a stilted form of centre-Left, technocratic nostrums, in a manner worryingly reminiscent of the deadening, ultimately self-defeating, post-war consensus. This combination may be temporarily electorally successful, as polling suggests, but longer-term high taxes don’t work and depress living standards. This experiment is bound to end in catastrophe.
The Tories are repeating their own history. In 1954, The Economist introduced the character of Mr Butskell, an amalgam of the then Tory chancellor, Rab Butler, and the previous Labour one, Hugh Gaitskell. The joke was that their policies were indistinguishable. The Conservatives embraced nationalisation and high spending, out of a misunderstanding over the causes of the Great Depression and a conviction that wartime sacrifices should be repaid with the redistribution of wealth. Harold Macmillan assumed that working-class Britons would only vote Tory if they were bribed by the Treasury, a patrician attitude that reached its zenith under Ted Heath.
At the heart of good government is coherent philosophy matched by experience. Margaret Thatcher was a grocer’s daughter and had imbued Hayek and Friedman; her best ministers, such as Lord Young, believed in capitalism because so many had actually run a business. Even Michael Heseltine, though he favoured state intervention, still put free enterprise, incentives and low taxes at the heart of his thinking. But parties, like churches or universities, are prone to culture shift and elite capture, and the Tories in the 2000s succumbed to the New Labour consensus about what it takes to win.
As the TaxPayers’ Alliance reports, there have in fact been 1,034 tax rises since the party came to power, a shameful record, and we are now back to Clement Attlee levels of taxation. There is little that is more disheartening than the sight of Tories agitating for tax increases, supposedly to bankroll lockdown, while Labour puts on a show of being against them.
Brexit requires making the UK more competitive, yet hiking corporation tax and capital gains tax would have the opposite effect. Research from the Oxford Centre for Business Taxation suggests that a 4 percentage point rise in the tax rate would reduce inward investment by 10 per cent. What counts are effective tax rates, not the statutory rate. Crucially, 24 OECD countries have a lower effective marginal tax rate than us: further damage to this position can only erode the Brexit dividend. Corporate tax increases are always felt by employees and consumers because the costs are passed on in reduced productivity, higher prices and lower wages.
Rishi Sunak is a hugely talented politician, and has plenty of private-sector experience too. He is right that, over time, the deficit musn’t be too high, but the answer is lower spending and faster growth, not an ever higher, Eurozone-style tax burden. Please Mr Sunak, don’t turn into a 21st-century Mr Butskell.