I warned ministers against a windfall tax

The Government has rightly acted to address the cost of living crisis, but time is running out for it to present a credible, sustainable longer-term economic vision ahead of the next election.

This has to be driven by more investment and increased competition that drives prices down and quality up for consumers, and supported by tax cuts and a supply-side agenda. The Government would likely say they are committed to all of this but recent actions suggest otherwise.

The economy has been hit by a succession of shocks and the war in Ukraine will keep fuel and food prices elevated. But we have also had a series of self-inflicted policy mistakes from the Bank of England and Chancellor, including higher taxes.

The next two years will be tough for the economy as bringing inflation under control is painful and the cost of living crisis will get worse before it gets better.

The Government has been handed a hospital pass on fiscal policy because of poor monetary policy over the last 18 months. The economy would have coped with tighter monetary policy last year and inflation would not have been as bad. Now the scale of tightening needed will hit the economy. Monetary policy must not go on auto-pilot and its speed, scale and sequencing needs to be influenced by economic conditions.

Also, the Bank must communicate better. Recently the Governor said he was helpless to control inflation. That is wrong. It risks feeding inflation expectations. Instead he should convey confidence that they will get on top of inflation, as the Chancellor rightly did this week. While higher interest rates will see zombie firms fail, it is important that banks ensure viable businesses that currently face a cost crunch do not also suffer a credit crunch. Inflation has yet to peak and will stay elevated before likely decelerating next year. But it is also the downside economic risks that merit serious attention. Consumer confidence has fallen to the lows seen in the financial crisis.

Thus, it was right for the Chancellor to provide his latest stimulus, although the windfall tax should have been avoided and his measures should have been better focused.the money raised from the windfall tax is not enough to mitigate its damaging consequences. It may not boost investment as hoped, but it damages the UK’S attraction as a pro-business investment destination. Firms in other sectors will fear they could be used as cash cows in future.

The economy needs a tighter monetary policy and a looser fiscal policy driven by tax cuts. The Chancellor’s latest actions will help as they ease fiscal policy.

If the economy tanks, the budget deficit deteriorates. The fiscal numbers have improved over the last year because of recovery, and receipts have been helped slightly by higher inflation as people and firms are spending.

The Chancellor was right to announce timely, temporary and targeted help to those on low incomes.

Doing this via universal credit and an immediate uplift in benefits would have been better than the way he opted for. Universal credit has now been designed as a strong back-to-work benefit, and by avoiding using it the Chancellor has reduced its incentives to get people back to work. Yet with a tight labour market that is necessary.

Linking temporary help to high fuel prices was important. But instead of and across-the-board fuel subsidy of £400, other options could have offset high fuel prices via temporarily suspending some permanent aspects of fuel duties. Such as cutting VAT, reducing fuel duty or, without undermining green credentials, a temporary suspension of the environmental levy.

Sunak should have considered seriously helping the squeezed middle by bringing forward the one pence income tax cut, which costs £5.4bn in a full year. If the Treasury was worried about the inflationary consequences of this, then it seems odd to have cut fuel duties for all.

The key now is to help while fuel prices stay elevated, but the scale of such handouts cannot persist. The focus has to be on a pro-growth strategy, driven by the private sector and with fewer government interventions.

While growth is low the Treasury believes the budget deficit is structural and needs higher taxes to fund it. Furthermore, while good public services are essential, the path of ever higher spending without reform adds to the pressure on taxes too. Yet, for the economy to grow it needs not only a credible monetary and fiscal policy, it requires incentives that encourage investment and reward work, through lower taxes and smart regulations. Instead of tax and spend, it should be incentivise the private sector to grow.

‘It was right to provide stimulus but the windfall tax should have been avoided’