The Government’s growth-sapping plans to enlarge the state will make us all poorer
How does a country pull itself out of debt – by raising taxes, by cutting spending or by seeking to expand its economy so that its liabilities dwindle in proportionate terms? Until very recently, almost every Conservative would have answered with some combination of the latter two. Raising taxes doesn’t just diminish freedom; it diminishes prosperity. There comes a point when high tax rates make earning and investing unattractive. So people start working shorter hours, retiring earlier, moving abroad or joining the black market. Like an over-fished sea, the revenue-generating part of the economy becomes depleted.
By contrast, cutting taxes intelligently leads to more investment, more employment and thus, in the end, higher revenue. When Ronald Reagan ordered the biggest tax cut in American history, he was asked whether he worried about the impact on the deficit. “Oh, I’m not worried about the deficit,” he replied with a characteristic twinkle in his eye. “It’s big enough to look after itself.”
What he meant was that, if his tax cuts worked as he expected, the deficit would become smaller as a proportion of GDP. And, though the effect was of course delayed, he was right: the deficit tumbled after 1992 and had disappeared by 1998.
Much the same thing was happening in the United Kingdom at the same time. Nigel Lawson’s tax cuts led to a surge in growth. As wages rose and unemployment fell, the government started getting more cash in and paying less out.
I am sorry to labour what you might feel are obvious points, but they are evidently not obvious to everybody. The debate over the Budget has largely been between those who want to raise taxes now so as to start narrowing the deficit and those who want to let the recovery get under way first. Both sides take for granted that at least some of the spending increases decreed over the past 12 months will be permanent.
Sadly, they may be right. Government programmes are more easily launched than wound up, grants more easily offered than terminated, bureaucracies more easily created than disbanded. Some of the supposedly contingent measures imposed in 2020 are already being treated as an immemorial part of the constitution: free school meals out of term time, grants for charities, extra healthcare spending, higher universal benefit. The pressure for more intervention is coming at precisely the moment when we can least afford it.
Perhaps we take an expanding economy for granted. After all, with only a relatively brief blip during the global financial crisis, we have enjoyed low-inflationary growth since we left the ERM in 1992. People can hardly be blamed for becoming a bit blasé. But economic growth, like organic growth, needs the right conditions. In general, countries which pursue free trade, deregulation, lower, flatter and simpler taxes, secure property rights and open competition have wealthier citizens.
If a country does these things, it can afford to indulge itself in other ways. A strong, free, open economy can sustain a certain amount of green regulation, a minimum wage, rules on gender parity, paid holidays and so on. But growth is the prerequisite.
We seem to have forgotten that elemental truth. Most of the coverage of the deferred rise in corporation tax from 19 to 25 per cent, for example, assumes that companies will sit around waiting to be taxed. In fact, the progressive reduction in the rate to its present level led to a progressive increase in revenue, as firms opted to expand their operations in the UK.
It is true that the Budget is popular. High spending always is, at least in the short term. Labour sounds ridiculous when it complains that the Government is not spending enough, and the Tories have extended their lead to 13 per cent. Voters – there needs no ghost, my Lord, come from the grave, to tell us this – like the idea of state spending as long as they think that someone else is picking up the bill.
A poll taken immediately before the Budget showed, in essence, that people supported taxes that they imagined others were paying. Rises in income tax were backed, but only by 31 to 15 per cent; rises in VAT by 20 to 18 per cent; and in council tax by 17 to 13 per cent. By contrast, windfall taxes on profitable companies were backed by 67 to
16 per cent, dividend payment taxes by 61 to 20 per cent and corporation tax hikes by 61 to 19 per cent.
Again, apologies for having to spell this out, but all taxes are paid by human beings. Corporation tax is no more paid by the corporation than your licence fee is paid by your TV set or vehicle duty by your car. Companies will pass the costs on to their suppliers and their customers, reducing overall growth and making everyone poorer. And, trust me, there will be no point, at that stage, in telling voters that they backed your policies at the time.
People supported taxes that they imagined others were paying. But all taxes are paid by human beings