Liz Truss’s tax cut plan is perfectly Thatcherite

This week, the Bank of England delivered grave news. It forecast even higher inflation for longer than it had previously admitted, and now predicts a recession lasting for the whole of next year. The Bank is in danger of doing too much, too late to curb the inflation it helped to bring about. It is no wonder that it has now come round to the view that, on current policy, we will have a recession.

Writing in this paper before the Bank announced its latest decision, however, Nigel Lawson claimed that Rishi Sunak is right to say we need to press ahead with more tax rises on top of the tax squeeze that he has already imposed. This, it is said, is necessary in order to double up on the Bank’s efforts to curb inflation. Lord Lawson said that Mr Sunak is the true Thatcherite in this race. Having served myself as head of Margaret Thatcher’s policy unit, I beg to differ.

I admired Lord Lawson’s work as financial secretary to the Treasury, when he helped design a strong anti-inflation policy to cure the rapid price rises inherited in 1979-81 from the outgoing Labour government. But that strategy rested heavily on tough control of money growth, along with switching some of the tax burden from income tax to VAT. It is a pity the Bank and Treasury today thought money supply growth did not matter and went in for a major expansion by creating more money and buying bonds with it. This may have been necessary in 2020 to combat the lockdowns, but was continued for too long in 2021 when we were well into recovery. It was clearly likely to prove inflationary.

I was also a fan of Lord Lawson as chancellor when he made major reductions to taxation. He prided himself on removing smaller individual taxes, and made large reductions in the standard and higher rates of income tax. He thought then, rightly, that it would promote growth.

As he cut the rates of tax the revenues rose, and the rich paid a bigger share of the total.

He and I can agree that there are no easy options from here. It is important to prevent inflation from gaining a strong hold on our economy, creating a wage/price spiral where no one wins. It is also important to limit public sector borrowing. But this will prove a lot more difficult if we have a longer and deeper recession, exacerbated by overly high taxation. Lord Lawson tells us that Mr Sunak’s delayed cuts in income tax make more sense than Liz Truss’s immediate relief of some of the cost-of-living pressures. I struggle to understand how we can base income tax cuts in the period 2025-29 on planned growth in those years, when no one can make a reliable forecast that far out.

The UK is the only major country adding a National Insurance rise, higher energy taxes and business tax rises to a substantial tightening of monetary policy and an energy shock. The big increase in global energy prices which we have to pay is like a huge tax rise, with the added disadvantage that most of the money goes to overseas interests so we cannot spend it at home on government priorities as an offset.

Liz Truss’s targeted tax measures are needed both to ease the squeeze on family budgets a bit more, and to make a direct reduction in energy prices to help push inflation lower. If we can keep a labour market with plenty of vacancies for longer, we can help more people into work and off dependence on benefits, assisting public finances. A recession will raise the deficit mightily. Getting more people into work cuts benefit bills and will help curb public spending.

We are now in the business of trying to manage ourselves out of the bad outcomes the Bank has described. That is only possible if we are clear about the causes of the situation we are in.

Her targeted measures are needed to ease the squeeze on family budgets, especially as global energy prices go up