It is now time to be bold please, Chancellor

Imagine a country that is over-taxed, under-invested, over-spent, under-housed and in real need of an urgent shake-up. What would you do to make it better? Yes, that’s right, you would go away, have a long think and then – eureka! – threaten to slap a tax on plastic bottles. That will surely do the trick – who needs a supply-side revolution when you could get people to reuse a few more plastic bottles?

Isn’t that what every economic textbook teaches? The bottle tax, after all, is bound to prepare us for Brexit, and to see off the spectre of a quasimarxist Jeremy Corbyn government. Or perhaps not. Joking aside, let’s hope that the Budget, to be unveiled by the Chancellor on Wednesday, will be more imaginative and contain at least one or two real, game-changing policies, rather than an endless list of gimmicks, some marginally positive and some marginally negative.

The most important challenges are simple: we need faster economic growth, a more competitive economy and higher wages earned by higher productivity, and a housing market that works for the many.

The economics of Brexit falls primarily into the first category: a high-skills, low tax country with a supercharged private sector and a revitalised entrepreneurial spirit could, over the medium term, more than cope with whatever idiotic, self-defeating vexations the EU wants to impose on us. A tariff is like a tax: there is no real distinction between the two. Even income tax is a form of tariff: it imposes a wedge between how much a provider of labour earns and how much the buyer of labour pays. The difference is that a tariff is a tax between people trying to trade between borders, whereas other taxes hit people who try to trade within borders. A high tax economy is the equivalent of internal protectionism: it makes individuals less likely to engage in economic exchanges, to work and to trade. Yet few commentators and politicians understand this profound similarity between the two.

It is also a point that Philip Hammond needs to reflect upon: he is rightly seeking to ensure that trade remains as free as possible between the UK and the EU. But if he believes in low tariff and non-tariff-barriers between the UK and the EU, he should logically also support low tariffs and non-tariff barriers between UK citizens – in other words, a much lower tax economy and far fewer heavy-handed regulations.

By the same logic, he should realise that any cost imposed on the UK by increased protectionism by the EU – which will be most damaging in the field of services for which licences are required – can be cancelled out by reduced taxes and red tape at home. Ideally, domestic and international trade would both be freed up and the UK and EU would come to a sensible agreement; but whatever happens an independent, post-brexit UK government will have a huge amount of power to liberalise Britain.

Britain is at a crossroads, and the challenges ahead will be immense. But we also need to be aware of what is already going right. One area where the lower pound is working is tourism. We were told by some that foreigners would boycott the UK after Brexit enraged by the politics of our decision: that was always utter nonsense. The irrationally large slump in sterling after the referendum has of course also helped: as the Office for National Statistics points out, overseas residents made 3.9m visits to the UK in August 2017, up 5pc on the same month of the previous year. These tourists and business travellers are also contributing more to the economy: they spent £2.8bn, up by 3pc.

Just as predictably, the weaker pound is also discouraging British residents from travelling abroad: the price system is making us live within our means again. Around 8.9m of us travelled abroad in August, down 3pc on the previous year; we spent £6.2bn, up by 1pc. Obviously, it would be better were UK residents able to afford to travel more abroad, and to consume more imported goods: but to be able to do that sustainably, the UK needs to bolster its productivity and output. We can’t spend if we don’t produce more first. That is the Chancellor’s challenge, and he will need to think far more radically if he is to go at least some way towards meeting it. allister.heath@telegraph.co.uk

‘We were told foreigners would boycott the UK after Brexit – nonsense’