Ex-chancellors warn against tax hikes as fears for recovery grow
The official growth figures have failed to excite ministers, and for good reason, says Russell Lynch
TWO former Tory chancellors have warned that Rishi Sunak risks wrecking Britain’s recovery if he launches a massive tax raid on businesses, amid fears the post-lockdown economic rebound is losing momentum.
George Osborne and Sajid Javid said officials should instead seek to rein in spending to restore the battered public finances, as forecasters warned that the country faces a brutal autumn with growth fizzling out.
GDP jumped by 6.6pc in July compared to June, according to Office for National Statistics (ONS) data released yesterday, in a third straight month of bumper expansion after an unprecedented collapse when Covid struck.
But economists have said that the recovery is threatened by new Covid-19 restrictions and an expected blizzard of job losses as the furlough scheme is wound down next month.
Mr Sunak’s predecessors warned him against hiking corporation tax to curb a surge in borrowing that has taken Britain’s national debt above £2 trillion for the first time and over 100pc of GDP. It follows reports that the Treasury is mulling a rise in the tax from 19pc to 24pc.
Mr Osborne, who was chancellor for six years, said “higher taxes will impair economic growth”, arguing that a favourable regime for business is a key ingredient to the recovery.
Speaking at an online conference hosted by the Centre for Policy Studies think tank, Mr Osborne said: “For the UK, an open trading economy, having a competitive business tax environment is really important. For me, Britain jacking up the business tax rate, what message does that send to business around the world?”
The architect of post-financial crisis austerity, Mr Osborne said that officials will need to set out a credible multi-year plan to rein in borrowing and are “going to have to look at spending restraints”.
Mr Osborne said: “The truth is there are not out there the tax rises that are publicly acceptable that will raise significant sums of money.”
He also warned that ending the furlough scheme in October is a “gamble”.
Mr Javid echoed the warning against hurting businesses with tax rises, arguing that temporary cuts could help boost the economy. He said: “I wouldn’t want to see any increased taxes that would hit businesses – those small and medium enterprises, entrepreneurs, the wealth creators – because we need to encourage those risk takers.”
Mr Javid said “billions of savings” could be found from government departments instead.
The warnings came as economists said that Britain’s recovery is at risk of stalling. New ONS figures for July appear to be teeing up a record-breaking performance in the third quarter, but output remained 11.7pc below precovid levels. Hospitality and education industries drove a continued recovery, but the services industry’s output was still 13pc below pre-virus levels.
Meanwhile, Mr Sunak left the door open to delaying the autumn Budget amid the heightened uncertainty. He asked the budget watchdog to produce an economic and fiscal forecast in mid to late November but did not commit to revealing his tax and spending plans.
Another big rise in GDP might seem like reason for cheer, but ministers – wisely – are not getting too elated. Rishi Sunak, the Chancellor, called a 6.6pc rise in output during July welcome, but added: “I know that many people are rightly worried about the coming months or have already had their job or incomes affected.”
He is right to be cautious. Looking in the rear-view mirror is no way to judge the road ahead. We’re barely halfway back, and the second half will be a lot harder.
The economy’s advance – lower than June’s 8.7pc spurt – still leaves it some 11.7pc below its pre-pandemic peak.
And while the economy’s restart throws up some eye-catching figures, such as the 140.8pc rise in accommodation and food services thanks to “super Saturday” reopenings, the more pertinent statistic is that the sector is still 60pc below pre-covid levels.
Across the UK overall, the main
‘As Boris Johnson’s rule of six comes into force, the lost ground becomes even harder to recover’
sectors of the economy are still well off February levels. Construction is 11.6pc down, production 7pc off and services output is still 12.6pc below its prepandemic peak.
As the Bank of England has pointed out, the UK is more exposed than most to activities that rely on interaction, such as restaurants or sports events, which account for around 13pc of output.
As Boris Johnson’s “rule of six” comes into force, that lost ground becomes even harder to recover.
Admittedly, the UK remains on course for a record quarter of growth, helped by August’s Eat Out To Help Out bonanza and the stamp duty cuts that have given a temporary kick to the housing market.
Via a statistical quirk, schools – even though shut in August – will also add to growth because they are closed every summer. Their reopening this month will do the same, although the impact of new social restrictions will work against the effect.
Even trade will help, albeit for the wrong reasons as the collapse in UK imports has been much deeper than the fall in exports, strengthening our trade surplus.
But growth rates are not the key here: it is the level of output.
The Bank of England suggests we will not regain pre-covid trends until the end of next year, but other forecasters are more pessimistic; some suggesting as much as four years to recover lost ground.
In the months ahead, we will likely see a curving-off of the second line in that sharp-looking V; just watch how it flattens out, or trends downwards as the nights draw in.
According to the Office for National Statistics, 11pc or 3.6m of the workforce are currently on furlough. The Chancellor still insists that the scheme will finish at the end of October, but pressure is mounting for a targeted extension. For sectors like the arts and hospitality, mass layoffs loom.
Yesterday’s figures are less useful than the ONS’S faster indicators, which give a more real-time take on activity.
The signs are not encouraging: job adverts measured by the statisticians have fallen from 55pc to 50pc of their previous year’s levels.
There has also been a noticeable spike in voluntary wind-ups of companies in recent weeks.
Trends like these suggest the GDP figures are nothing more than the respite between the self-induced economic coma of the spring and the “plain vanilla” recession of sinking demand, looming into view along with no-deal trade disruption.
As Shakespeare aptly put it, “summer’s lease has all too short a date”. I hope you enjoyed it while it lasted.