Hammond could take a tax lesson from Trump

The Tories should follow the example of a businessfriendly President for the post-brexit world

To be credible, governments need to be consistent. Those that chop and change rarely last for long. Yet despite the merits of setting the compass and sticking to it, there comes a time in every administration’s affairs when it must radically change tack if it is going to survive.

This is one such moment. So deep is the sense of drift, backbiting, recrimination and crisis in Theresa May’s Cabinet that a mere reshuffle, however wide-ranging, is no longer sufficient. It would be cosmetic applied to a crumbling facade.

To stand any chance of renewal, Mrs May needs something fundamental, something that forms a clear dividing line with Jeremy Corbyn’s government-in-waiting. As was all too apparent in Mrs May’s speech to the CBI annual conference this week, there is no such differentiation as things stand. Her defence of capitalism was half-hearted and unconvincing. Like Corbyn, she appeared to accept there is much wrong with it. The difference, it sometimes seems, is only one of degree.

For help, Mrs May and her Chancellor, Philip Hammond, could usefully look to Donald Trump’s America, widely derided though it is. A year on from his election as president, there is at least one thing that can be admired – his strongly pro-business, deregulatory and tax-cutting programme. Remarkably for someone who is condemned as a “demagogue” and a “populist”, Trump manages not just to “get away” with this seemingly unfashionable and politically incorrect agenda, but plausibly to champion it as a key plank in his ambitions to “make America great again”.

While America debates how to cut taxes, the focus in the UK is on how to raise them – overtly in Labour’s case, so as to punish the rich, and surreptitiously in the Government’s, in the hope that nobody notices. While Britain obsesses over the pitifully thin “exposé” of nefarious tax avoidance supposedly revealed by the so-called Paradise Papers, America is acting against the problem at source, by reducing its own tax rates so as to destroy the incentives.

The UK Conservative Party claims to be a tax-cutter by inclination – and, to be fair, there have been some limited examples of it in the past seven years of Tory-led government. But the overall tax burden has been on the up, and there are no plans to ease it.

Tax receipts are around 37 per cent of GDP in the UK, and that’s where they are expected to remain for the foreseeable future. This is not particularly high by the standards of other advanced economies, but nor is it particularly low. Other English-speaking nations tend to be quite a bit lower, at 35 per cent for Australia, 34 per cent for New Zealand, 32 per cent for the US and 26 per cent for Ireland. Theoretically, then, there is plenty of scope for cutting tax.

Yet, in practice, the Government is constrained not just by the reality of a continued deficit, but also by its own self-imposed fiscal targets, which require a balanced Budget by the mid-2020s. This might not seem a particularly challenging goal – it’s a lot looser than it used to be – but it gives very little scope for tax cuts unless they are paid for by further, swingeing reductions in spending.

Tories make a virtue of their supposed fiscal discipline, which for electoral purposes they contrast with the ruinous profligacy of Labour spending plans. But as was evident from the results of the last election, that narrative is wearing thin. Nobody much cares about fiscal discipline any more, although they should. Even the markets seem to take every breach of the targets in their stride.

As for Mr Trump, he cares not a fig for what the economists and the think tanks say about his tax plan, published late last week. There is good reason to question both its detail and, with the US economy already at full employment, the economic rationale of its timing. Yet in its sheer scale and ambition, it’s impressive.

And it is what Republican presidents do. When in opposition, they are fiscal hawks, but when in power, they turn into pump-priming Keynesians. What Trump is doing with his $1.5 trillion tax plan is renewing America’s credentials, after years of erosion, as a relatively low-tax, business-friendly jurisdiction where entrepreneurs can flourish and largely keep the rewards.

There is plenty in the Trump plan that you would not want to duplicate in Britain, where there is in any case no need for the radical overhaul of corporation tax so urgently required in the US. But with the economy slowing and investment stalling, the need for action to ready the nation’s tax competitiveness for a post-brexit world is obvious.

The Chancellor worries about the deficit and, if he lets rip, what it would do to the country’s fiscal credibility. But he should ask himself this question; what, given the current parlous state of affairs and the Corbynite real deal in fiscal irresponsibility waiting in the wings, has he got to lose?