Hague tells Tories to prepare for tax rises
Just like Pitt in 1797, the Government needs to raise taxes to prove that its debt burden is sustainable
SOME business and personal taxes “have to go up”, Lord Hague, the former Conservative leader and close ally of the Chancellor, says today.
In an article for The Daily Telegraph, Lord Hague writes that people who oppose some form of tax rises in the current climate are buying into “dangerous illusions”.
The intervention the day before Rishi Sunak stands up to deliver his Budget will raise eyebrows given the fierce debate about tax rises in the party and the pair’s close relationship.
“It pains me to say, after spending much of my life arguing for lower taxes, that we have reached the point where at least some business and personal taxes have to go up,” Lord Hague writes.
“Conservatives need to remember that for 200 years, from Pitt in 1797 to Thatcher and Cameron in our own day, keeping the country creditworthy has stood them in very good stead.”
The Chancellor has been considering tax increases in his Budget but has been warned against them from prominent Tory MPS. Support from a party grandee such as Lord Hague will only fuel speculation that he is preparing to defy backbench calls, or at least indicate that increases are coming soon.
The Telegraph can also disclose that Mr Sunak will announce a £300million funding boost to save summer sports such as cricket and tennis.
Tens of millions of pounds are expected to go to the England and Wales Cricket Board, allowing it to protect grassroots cricket and facilitate the return of fans into grounds.
Mr Sunak is also preparing to spend £408million to help museums, theatres and galleries in England to reopen once coronavirus restrictions start to ease, it was reported last night. The Chancellor will also announce a scheme to help 130,000 small businesses expand by funding improvements in their digital operations and offering Mba-style business training. One part of the scheme, “Help to Grow”, will offer vouchers of up to £5,000 for businesses to buy new software to improve their online operations. Another will offer mentoring and business school training to 30,000 small company leaders. A Treasury source said the £520million scheme was one of the “big bets” in the Budget.
Boris Johnson said yesterday he believed a “strong, jobs-led recovery” was coming, later adding that fuel duty would be frozen for the 10th year in a row and that the new green agenda would not result in levies on meat or carbon.
Sajid Javid, the former chancellor, said: “If Rishi doesn’t set out a credible plan now, excessive debt will impact the ability of future governments to properly fund our public services and act as a burden on future generations.”
‘It pains me to say ... we have reached the point where at least some business and personal taxes have to go up’
Iknow I will be in a small minority when I say that the approach of tomorrow’s Budget brings to mind the Budget delivered on November 24 1797. That was the work of one of my favourite figures in history, William Pitt the Younger. On that day he announced that, despite the nation’s great burden from being at war, he was going to increase various taxes – on windows, servants, carriages and horses – to give confidence that the ballooning national debt could still be financed in the future.
Pitt’s tax increases were savagely attacked in Parliament, and were evaded so widely that he had to invent income tax the following year. He nevertheless achieved his paramount objective, which was to keep Britain creditworthy even while borrowing on a vast scale. Being in good credit enabled the country to finance the long wars against Napoleon, and, along with being a home of innovation, was the foundation of British supremacy in the 19th century. Ensuring debt was sustainable proved more important than avoiding some immediate tax rises.
If press briefings and speculation are to be believed, Rishi Sunak, the Chancellor, will announce some such rises in the Budget, and at the same time add to the colossal support he has given to households and businesses since the pandemic began. Rumour has it that he will increase corporation tax, and possibly decline to raise the thresholds of the income tax bands. He has left no doubt that he will still be pumping money into the economy, on top of a record splurge of spending and borrowing that has resulted in the UK running a deficit of more than £300 billion in the current financial year.
Already, however, a wide range of MPS from Left and Right have declared that there should be no imminent tax rises at all. The Labour Party has decided that it is against all increases, and some distinguished Tories have joined in. Many of my old colleagues have argued that this is not the time for raising any taxes and that freezing thresholds would be a mistake. They also say that the revenue from corporation tax has increased since the rate of it was reduced, so that shouldn’t be raised either.
It has been left to the former chancellor, Ken Clarke, to defend what remains of fiscal conservatism. He said at the weekend: “This is the taxpayers’ debt we are piling up now. If we don’t actually get it under control, signal how we’re going to get back to fiscal common sense before inflation comes back and interest rates go up, we will face a financial crisis once the burden of paying interest rates begins.”
He is right. It pains me to say, after spending much of my life arguing for lower taxes, that we have reached the point where at least some business and personal taxes have to go up. To maintain the opposite view, you have to believe in one or all of the following three arguments: that we need a smaller state, and it is spending that should be cut as soon as possible after the crisis; that higher tax rates generally produce less revenue anyway; or that we can go on borrowing at very low interest rates for so long that all tax increases can safely be postponed. All three of these arguments are now dangerous illusions.
Most of us Conservatives have spent decades arguing for a smaller state. In the 1970s, and for a long time afterwards, we were right. But in the 2020s this argument is already lost. Austerity was jettisoned at the last general election. After the pandemic, the British state is certain to be bigger, spending billions more every year on healthcare, vaccinations, stockpiles of equipment and much-needed support for apprenticeships and opportunities for the young people and others who have lost out most heavily in the crisis. For the foreseeable future, the state is going to be bigger.
So what about lower tax rates generating more revenue? There are certainly circumstances where this holds true, but usually those apply when a tax is highly complex or set at such penal rates that people will go to great lengths to avoid paying it. That is not the case with, for example, UK corporation tax. The Institute for Fiscal Studies found that the increased revenues from this tax, after the rate of it was reduced from 2010 onwards, were due to the recovery of the economy from the global financial crisis and the simultaneous abolition of many allowances and reliefs. If the Chancellor chooses his measures judiciously, he can certainly raise more revenue with some higher tax rates.
It is, however, the third illusion that is the most dangerous, and much the most prevalent in Britain and abroad. This is that economics has fundamentally and permanently changed; that we are in an age of low inflation with ultra-low interest rates for decades to come; and that the state can borrow so cheaply that any day of reckoning is for another generation, if ever. In its more extreme form, this way of thinking embraces Modern Monetary Theory, including the idea that central banks can finance government deficits by creating money, not merely for the moment but indefinitely.
This illusion is wonderfully convenient for everyone who wants to argue that we can continue to spend without ever having to raise any taxes. It is dangerous because inflation can easily return, particularly when pent-up demand for goods and services follows release from lockdown. And it is particularly dangerous in Britain because so much of our debt is index-linked – about a quarter of it, compared with an average of 3 to 8 per cent across major developed nations.
If you have savings and you rummage in your files for your National Bonds or certificates, you will be pleased to find that many of them are indeed linked to prices. That is also true for our creditors around the world. A rise in inflation would mean our debt getting out of control.
When the Chancellor gets to his feet tomorrow, he will no doubt continue to spend on a massive scale. But it is also time to rediscover and reassert some basic truths of fiscal conservatism and cast illusions aside. That Labour will oppose this is perhaps not surprising. Conservatives need to remember that for 200 years, from Pitt in 1797 to Thatcher and Cameron in our own day, keeping the country creditworthy has stood them in very good stead.