Tories have trashed Thatcherism and embraced Europe’s politics of decline

Sunak’s Budget showed that Conservatives now think growth materialises like Manna from Heaven

For the past 50 years, the Tory party had believed that high tax rates, especially on income and profits, were bad for the economy and strived to cut them. Today, this is no longer true: Rishi Sunak’s increase in corporation tax is the first time the rate has been raised since Denis Healey’s demented Budget of 1974, shortly after the infamous Labour chancellor had promised to squeeze the rich “until the pips squeak”. It is also a straight lift from Jeremy Corbyn’s manifesto: he wanted to raise the rate to 26 per cent; Sunak opted for a near-identikit 25 per cent.

The Tory taboo on increasing direct rates of taxation, a key ideological differentiator with Labour since Edward Heath’s days, is over, and the psychological and practical consequences should fill freemarketeers with despair. Britain will continue its shift to the Left on economics, sinking ever deeper into a social-democratic, low-growth, European-style model: our choice will be between a high tax and a very high tax party. Labour will be emboldened. We will benefit from Brexit, but not by as much as we could have.

Sunak would love to be seen as the next Nigel Lawson, but the latter chainsawed the headline rate of corporation tax from 52 per cent to 35 per cent in 1984 and the top rate of income tax from 60 per cent to 40 per cent in 1988; he also simplified taxes while Sunak is making corporate levies more complex. Geoffrey Howe slashed the top rate of tax from a combined maximum of 98 per cent to 60 per cent in 1979. George Osborne sliced corporation tax rates, and took the top rate of income tax back down to 45 per cent.

Yes, the Tories have also put up a lot of levies in their time – especially VAT – but there was usually a logic to their actions. They felt that taxing consumption – or petrol, or tobacco – was less damaging than taxing income from labour or capital, and they were right. They understood that there is a hierarchy of taxes: some damage the economy more than others. It is this economic and philosophical understanding that has disappeared from Tory thinking, which is fixated only on short-term politics.

Instead, much of the party has fallen foul of the Manna from Heaven theory of economics: that growth is a given, that prosperity and jobs just happen, and therefore that people and businesses can be taxed to ensure “fairness” or “equality” with no economic consequences. In this nonsensical worldview, taxation is a purely political choice, a tool to buy voters or signal virtue, not a driver of economic success or failure.

In the past, the Conservatives tried to keep taxes down overall because they believed in a causal relationship between a larger private sector and faster GDP growth. Boris Johnson, sadly, is planning to increase spending permanently by two percentage points of GDP and taxes by one. He is a big-government Conservative, who believes that much of his extra spending will directly make the UK wealthier, and this is the real reason – not Covid – that explains why Sunak felt obliged to go against his own instincts and put up the taxes he did.

Unless he has a change of heart prior to the next election, Johnson will be remembered as one of the few Tory prime ministers – together with John Major, David Cameron and Alec Douglas-home – who increased taxes as a share of the economy. They fell heavily during Winston Churchill’s second term and under Harold Macmillan, Anthony Eden, Edward Heath and Margaret Thatcher. By contrast, Labour’s Tony Blair and Harold Wilson dramatically jacked up the share of national income confiscated by the state, according to the Taxpayers’ Alliance.

Sunak at least defeated proponents of the magic money tree – believers in the idea that budgets never need to be balanced or that money can be borrowed indefinitely to finance unlimited spending. But this doesn’t mean that corporation tax hikes and stealth income tax rises were the answer: it would have been better to find savings in non-covid current expenditure over time; or even to break the Tory manifesto, citing the emergency that is Covid to raise VAT. It bears repeating that the main problem facing the public finances longer-term isn’t the economic scarring from the pandemic, but the fact that the Tories are determined to keep increasing spending as if Covid never happened.

Sunak’s raid on big companies will take corporation tax receipts to their highest levels since the height of the Lawson boom, when profits were artificially inflated. This is the wrong signal to be sending to multinationals and entrepreneurs, most of whom are still spooked by Brexit. The superdeduction for capital expenditure will turbocharge investment, but only for two years. The UK’S effective marginal corporation tax rate is already higher than the Brics nations and all other G7 members except France; after Sunak’s raid, our own rate will almost certainly be higher, giving François Mitterrand and Jacques Delors the last laugh.

The UK already raises far more from corporate taxes than other countries, as Douglas Mcwilliams of the Centre for Economics and Business Research points out. In 2018, Britain received 8 per cent of its receipts from corporate levies despite a headline rate of 19 per cent. France collected just 4.6 per cent of its total with a rate of 33 per cent and Germany 5.6 per cent with a rate of 30 per cent. Headline rates are psychologically important, but capital allowances and other exemptions matter hugely when it comes to the actual bill, and thus firms’ decisions to locate their operations in a particular country. The Office for Budget Responsibility’s verdict is damning: the cost of capital will rise, which will substantially reduce business investment when the super-deduction expires. That can only mean lower productivity and lower wages.

Reaganomics is over in Britain, dead and buried, as is much of the economic side of Thatcherism. Paradoxically, Johnson, who likes to quote Ibn Khaldun, the 14th century Tunisian scholar who was one of the real inventors of the Laffer curve, has felt it necessary to turn his back on the supply-side legacy of the Eighties. Until recently, the Prime Minister believed in increasing the threshold at which the 40p tax rate begins; now he is doing the opposite in real terms.

This was an avoidably bad Budget that will haunt the Tories for years to come.