No tax cuts before inflation cools off

PM fears cost of living crisis could worsen despite calls to ease burden on households

BORIS JOHNSON is not planning to cut taxes for households until inflation is brought under control, meaning action is unlikely before next year.

Downing Street and the Treasury fear prices could rise further if taxes are reduced to help with the cost of living.

The Bank of England and the Organisation for Economic Co-operation and Development (OECD) expect inflation to start dropping next year.

As a result, pressure to bring forward a planned income tax cut and to reverse the increase in National Insurance contributions is being resisted for now. Rishi Sunak has refused to promise cuts to personal taxes in his autumn budget, but he has pledged to help businesses.

The economy contracted by 0.3 per cent in April, the Office for National Statistics said yesterday – the second successive fall in GDP, following a 0.1 per cent reduction in March. The news fuelled fears that the UK could be heading into recession, as prices are soaring, a phenomenon known as “stagflation”.

Conservative MPS yesterday rejected the Prime Minister’s position, warning that the slowing economy showed the need for measures, such as tax cuts, to kickstart growth.

Discussing calls to cut tax, Mr Johnson told LBC yesterday: “Yes, of course I understand that we need to bear down on taxation and we certainly will.

“[But we’ve got an] inflationary spike that we’ve got to get through right now, looking after people as we go through that. And that is what we’re going to do.”

A senior government source explained the Prime Minister’s position further, saying: “We’ve got to be responsible. We can’t do anything that inflames [price rises] further. That’s why everything we’re focused on is about growing the economy.”

The cost of living crunch is due to intensify in the coming weeks as petrol prices rise; last week it cost £100 to fill the tank of the average family car. Interest rates are also expected to rise to a 13-year high on Thursday, creating further pressure for those with mortgages. The impact of the 1.25 percentage point National Insurance rise is also starting to be felt, having come into effect in

April. Yesterday, it was announced that David Buttress, the founder of the Just Eat food delivery service, has been appointed the Government’s “cost of living tsar” to help convince businesses to offer families more cheap deals.

The Bank of England forecasts that inflation will peak at 10.2 per cent in the fourth quarter of the year before falling to 9.3 per cent in the first quarter of 2023 and 6.7 per cent in the second quarter. The OECD, an international body, has similar predictions for the UK.

But there is no guarantee that rising prices, triggered by supply issues after lockdowns and exacerbated by Russia’s invasion of Ukraine, will not continue for longer. The Bank of England had predicted inflation would fall this year.

David Davis, the former Brexit secretary, rejected the argument that tax cuts should come after inflation falls.

He said: “There’s this strange new argument coming out that somehow taxation is a way of defeating inflation. High tax does not defeat inflation – it makes the impact of it more miserable for the ordinary family. Secondly, we will be facing stagflation, not inflation. The best way to deal with that is to get the growth rate up, which is another argument for lower taxes. Tax cuts should come before the spike in inflation.”

The Prime Minister repeatedly expressed his determination to cut taxes last week as he sought the support of Tory MPS before the vote on his leadership. He then used a speech on Thursday to call the tax burden – likely to be at its highest in 70 years – an “aberration”.

However, Mr Johnson has declined to identify any tax cuts being considered.

Sir John Redwood, the Conservative MP, argued in the House of Commons that a tax cut could help those whose incomes have been undercut by rising prices. He asked: “Why is the UK Gov- ernment the only advanced country’s government making a big increase in the tax burden at exactly the same time [as] there is very necessary monetary tightening to control the inflation, and a huge hit to net incomes from that inflation itself ?

“Isn’t the big tax rise bound to make things worse and slow the economy?”

Tumbling back down a rabbit hole is the only way I can describe my return to Britain after a road trip through America. This might sound strange, given the dysfunction that has long gripped the US. Horror is only growing over the impotence of Joe Biden, who is sinking into a quagmire of abysmal policy errors. The US economy is overheating, triggering an inflation crisis that was completely avoidable. One of the world’s largest oil and gas producers somehow faces its highest energy prices in over a decade, in the wake of a hubristic push towards renewable generation. America’s derangements stretch far beyond the Washington bubble – from the regular mass shootings to the racial hang-ups, and the addiction to debates over divisive issues such as abortion.

Still, I can’t help but think that Britain’s crisis is in a league of its own. With economic growth set to be the worst in the G20 apart from Russia, the UK risks tipping into a spiral of decline. Worse, nobody seems to care. A culture of complacency has spread across all of society, with many people merely shrugging at the failures and incompetence of not just the public sector, but the private sector too. The country’s politics, meanwhile, is descending into a soap opera. As Boris Johnson clings to power, No 10 is pushing out a parade of gimmicky policies designed only to get the Prime Minister through the week. Six years on from Brexit, the country’s divisions are nowhere close to being healed.

For all its toxic idiosyncracies, the United States is more likely to be able to weather its current challenges – and perhaps even emerge stronger. That is partly because, unlike Britain, the US has the luxury of a large and resilient economy. Its inflation trends are nowhere near as severe or persistent as those gripping Britain due to lower worker bargaining power and vast reserves of natural gas.

But Americans also tend to be more honest about their country’s strengths and weaknesses, as well as its strategic mission. Although Washington faces an epic fight to maintain its supremacy in the face of China, the nation’s leaders have realised that it is a fight they will have to win. There is a lively public debate about the policies that might be needed to make that happen, as well as to rescue the US from the succession of blunders that its politicians have inflicted on the country. One of the triumphs of the federal system is that it allows Americans to succeed despite the failures of their leaders. Witness the tech firms fleeing high-tax California for the likes of Texas and Florida.

There also remains a certain confidence in the future. Yes, Americans are gloomy – and for good reason. But their culture remains intensely practical, infused by a can-do spirit that is present in politics, business and everyday life. Yes, the US might be rocked by a pernicious culture war, but it is also where the “woke” ideology is most effectively being combated, with voters throwing out ultra-progressive politicians who have gone too far.

Americans have also not fallen into post-imperial despair now that they have accepted that their role is not to be the world’s policeman. Indeed, many of them realise that their role instead is to be the model that other countries want to copy. As Joseph Bankoff, the chair of Georgia Tech’s International Affairs school affirmed at a recent conference on technology competition between America and China: “The innovation we most need to work on is our democracy experiment. Because that will determine whether our view of the world continues to be attractive to everybody else.”

Such moments of lucidity elude British elites. Wealthy medium-sized countries like ours face more complex challenges than giants such as America, as they struggle to square the circle of how to stay dynamic and open but also resilient to global fluctuations, as well as contend with intense competition. And yet we are far less willing to ask ourselves what kind of nation we want to be. Many Britons, convinced of the country’s inability to steer itself, would happily devolve this question to the EU.

Nor is there much enthusiasm for interrogating our strengths and weaknesses. In their eagerness to blame Britain’s prospects on Brexit, Remainers ignore that Britain has been an economic laggard since at least the financial crisis. Indeed, we are plagued by structural weaknesses that no government has been brave enough to fix for decades. We have prioritised efficiency over resilience to an extreme degree. While we might like to think of ourselves as a startup nation, our companies are woefully risk averse. We lack the patient capital to scale firms, and the entrepreneurial vim to exploit our own inventions.

Take graphene. It was discovered at the University of Manchester in 2004, but it is China that is patenting applications of the technology and taking it to the mass market. One English scientist I encountered, who had moved from Cambridge to New York, put it to me that while there is “something in the water” at Oxbridge when it comes to academic excellence, Britain lacks the enterprising spirit of America, where no idea is too radical.

Moreover, while the cliché is that America is exporting its culture war to Britain, when it comes down to it, our country is in many ways more divided. For all the US’S racial and religious tensions, a powerful triad of ideals – liberty, rugged individualism and radical ambition – holds the country together. The romance of the American revolution has seared these values in the historical memory. They have been reified by popular culture, which glamourises the resourceful solitude of the Wild Western frontier and the visceral freedom of the American open road. Even those who resent what they call the “myth” of American freedom – from the Uber drivers who mourn the lack of European-style healthcare to the civil rights veterans who think American liberty is a fraud – are resigned to its potency.

In Britain, such a core identity is lacking. There is no emotional argument for the Union. The country is split between individualists and collectivists, and class snobbery poisons political debate. We do at least have the Queen as a unifying symbol. Otherwise, however, we are painfully bereft of the common values that will become more important amid the radical uncertainty that is likely to characterise the decades to come.

America is galvanised by the terror of losing its superpower status to China. Britain too should be roused by the fear of our own gentle slide into mediocre oblivion. We can turn things around, but we must first confront the severity of the problem.

Britain is split between individualists and collectivists, and class snobbery poisons political debate