Tax cuts will revitalise the spirit that made Britain the cradle of the Industrial Revolution

INFLATION hit a 40-year high of 9.4 per cent last week, the likes of which we haven’t seen since the darkest hours of Margaret Thatcher’s first term in office. The recession of the early 1980s will live long in the memory, with falling output, factory closures and rising unemployment.

Today’s dire circumstances seem grimly familiar, not least to me because I was one of Mrs Thatcher’s trusted economic advisers.

When she came to power in the 1979 Election, the greatest threat to Britain’s stagnating economy was double-digit inflation.

There were moments during the 1970s when the rate had been the highest in Europe, soaring above 25 per cent. In the course of the decade, food prices had risen by about 300 per cent.

Yet Mrs Thatcher’s government navigated its way out of the mess and I firmly believe we can do so again – provided, that is, we learn the correct lessons from that time.

By the end of the 1980s, living standards were on the rise and Britain was no longer the ‘sick man of Europe’.

Today, double-digit inflation is a very real prospect, with the cost of food, fuel and mortgages set to soar still further.

And, just as I did with Mrs Thatcher, I am happy today to stand with Liz Truss, and defend the economic vision she has laid out in her leadership campaign.

I believe the British economy can easily withstand the increase in borrowing needed to fund Liz Truss’s key promise: to start cutting taxes from her first day if elected to No 10. We need to revitalise our entrepreneurial spirit, just as Mrs Thatcher did, and this is the way to do it.

For all the furore her proposals seem to have caused among the conventionally minded – such as the BBC’s Nick Robinson, who last week mocked Liz Truss for wanting to ‘borrow tons of money’ – I’m convinced her programme is good, straightforward economics, backed up by a lot of research.

She proposes, for example, to reverse former Chancellor Rishi Sunak’s rises in corporation tax and his unpopular hike in National Insurance Contributions (NICs).

Why? Because these taxes damage what is known as the supply side of the economy – that is, the supply of goods and services. High corporation tax discourages business investment and innovation, the very things that are vital to help the economy to grow. Meanwhile, National Insurance Contributions corrosively push up wage costs.

Since reversing these taxes would stimulate commerce and increase the supply of goods and services available, this crucially would directly lower inflation, too.

Some disagree and say tax cuts will stimulate demand from consumers because they will be able to spend more. Inflation, they say, will rise even further as a result.

But this is not correct. It is entirely possible to suppress borrowing and bring down inflation by imposing higher interest rates (monetary policy) while, at the same time, using tax cuts to support economic output and avoid recession (fiscal policy).

Who says you can’t use both strategies at once?

When we look at the UK’s poor economic performance in recent years, it is clear why Liz Truss’s proposals make sense.

Following the 2008 financial crisis, Britain found itself in recession once again, David Cameron’s government pursued a policy of ‘austerity’, with severe restrictions on government spending to help balance the books quickly.

Ministers left responsibility to the Bank of England to stimulate an economic recovery.

The Bank embarked on a major programme of pumping money into the economy by buying the government’s own bonds, meanwhile driving interest rates to virtually zero. Yet the promised recovery failed to materialise.

The British economy remained enfeebled even before the shocks of Covid-19 and the Ukraine war.

It would have been far more effective to use fiscal policy – ie tax cuts to businesses and individuals – as well. Higher interest rates, meanwhile, could have kept prices stable and inflation at bay.

Instead of – effectively – printing more money, we should have been recharging the engines of real economic growth, just as we should now. Today interest rates need to rise – probably to a range of 2-4 per cent – and supportive fiscal policy can prevent that tipping the economy into recession.

Does it matter, as some say, that Liz Truss’s plans require the government to borrow to pay for tax cuts? The answer is no.

Borrowing allows the government to set tax rates for long-term growth while helping to finance temporary swings in spending and tax revenue. Carefully planned borrowing helps smooth through short-term shocks.

Insisting that Britain’s spending be matched by tax receipts year on year, as Rishi Sunak does, is just a recipe for bad policy – as illustrated by his absurdly damaging proposal to raise the corporation tax rate to 25 per cent.

Of course there must be an overriding commitment to sound finance. Both candidates for the Conservative leadership, Sunak and Truss, are committed to that. But sound finance comes from planning for the long-term, not from attempting to balance the books straight away.

In the course of the past two centuries, there have been just two moments when Britain’s debts amounted to more than 200 per cent of our yearly economic output. Once after the Napoleonic wars, and again after the hardship of the Second World War.

Yet on both occasions, it was brought back down to a manageable level over the long term – and with no damage to Britain’s market reputation.

This is the approach we should adopt today, when the ratio of national debt to national output, or Gross Domestic Product, is close to 100 per cent.

The idea that we must reduce it rapidly in some panicky way is wrong and destructive. Yet this appears to be the Sunak tax strategy – and it threatens to lead us towards recession.

There is another helpful element in Liz Truss’s economic proposals: the proposal to lengthen the period of time over which our national debt is repaid.

This would peg our debts to the current low interest rates for a considerable period of time – an important protection, as the fight against inflation means interest rates are bound to rise.

In the end, what is so exciting about the Truss programme is that it puts growth and the reforms that stimulate it back in the centre of the debate.

This is after years in which government thinking has neglected ‘supply side’ measures in favour of a mish-mash of other issues.

The Truss programme involves bringing tax rates down and

Reducing debt in a panicky way is wrong and could lead to recession

The country will be grateful to the Tories for endorsing Liz Truss

liberalising regulations. This would release once again the commercial energy and drive of which we know the UK is capable.

After all, Britain was the cradle of the Industrial Revolution, and Mrs Thatcher proclaimed her aim to be the revival of that entrepreneurial spirit within us.

And in this she succeeded, as the surge in growth of the 1980s clearly demonstrated.

But since then, we have gone backwards, with the economy increasingly encrusted by EU regulation. Tax rates, meanwhile, have been creeping upwards at all points of the income scale, particularly for entrepreneurs.

It is not just overall economic growth that will be revived by the Truss agenda. It will also be a huge force for levelling-up.

Our research at Cardiff University has shown that when taxes and regulations are liberalised, the growth effect in the North is actually bigger than in the South. Because the North has more spare resources – underused labour and land – the process will make it more competitive.

Liz Truss wants to strengthen this effect with a large number of enterprise zones, which ambitious local councils can use to attract new business to their areas.

She offers an economic programme that could genuinely transform our economy.

I am firm in my belief that it deserves the backing of Conservative Party members. And that the country will be grateful to them for endorsing it.