An economic crash is coming. There’s only one way to survive it

The easy option is to raise taxes and spending, but it doesn’t actually work. We need to cut for growth

So far it has only been a phoney war. The vast majority of people still have jobs, even if they are not going into an office or factory. Taxes have not been raised. Quite the opposite, in fact. The Government has subsidised going to restaurants.

Many people might be lulled into thinking that this is our new way of living. But it isn’t. The economic pounding to come cannot be delayed much longer.

So far the jobs furlough scheme has camouflaged the underlying, brutal increase in unemployment, and the vast increase in borrowing has hidden the way the Government has been spending income it does not have. Many renters of homes and offices have been allowed to take a rental holiday. But none of this can continue. The first two would lead to a bankrupt government and the last would amount to a Marxist expropriation of property and destruction of the rental sector.

The moment when the economic crunch finally arrives will be the moment when this Government will define itself – the fork in the road that decides the future of Britain for years to come. The Government will choose from two possible routes.

The more tempting option will be to treat the economic crisis as though it were a political one. Taxes will have to be raised, of course. But the Government would make a point of hitting the rich hardest.

This is the strategy that California is currently toying with. Some lawmakers there are proposing an increase in the top marginal rate of tax, while others are going further and suggesting a wealth tax. This is also the road that François Hollande took after winning the 2012 presidential election. In this election he boldly “rejected” austerity, and pursued a “millionaires’ tax”. This was all good politics but lousy economics. It was followed by economic growth so low that it struggled to breach 1 per cent. Mr Hollande was ejected from office at the next election.

Taxing the rich was also the tactic taken by the Labour government of 1974. The top rate of tax was raised to 83 per cent plus a 15 per cent tax on dividend income. That led to economic failure and then electoral failure, too, because in the end, people do notice how well the economy is doing.

In the corridors of power, some long to tax the rich more with an increase in capital gains tax, perhaps higher income tax and even a wealth tax. But the result will be as it always has been. It will dampen the fire of free enterprise, inhibit growth and not even raise extra money. As happened in the Eighties, lower taxes on the rich bring in more money, not less.

The apparently easy option of expanding the state would involve lots of public spending, particularly on big, showy projects. These projects would obviously add to the amount of money that needs to be raised through borrowing or taxes. It is another wellestablished rule of economics that if you tax too much then growth suffers – as it also does when a nation borrows to excess. Japan, for instance, has never regained its previous fast growth since its government borrowing soared in the Nineties. Italy has become one of the sick men of Europe after being weighed down with a debt level that we in Britain are now approaching.

This first route is an attempt to avoid tough reality. It is a denial of the truth, a pretence and an avoidance of what really needs to be done. It is the economic equivalent of how the Soviet Union reacted to the Chernobyl nuclear disaster – denial and delay, ultimately making the situation worse. Its proponents think it is the safest thing to do. It is actually doomed to economic and then political failure.

There is a second road to take. It is what Margaret Thatcher did to restore Britain after the disastrous Seventies. It is a policy that faces reality and gives the free market every chance to respond and adjust. Taxes would still have to rise, of course, but the chosen taxes would be ones that do as little damage as possible to incentives to work and enterprise. Income tax would be kept as low as can be. No increase would be made in the top rate of tax and ideally a reduction would be made. Taxes would mainly be on the consumption of non-essential goods.

To keep tax rises within limits, a further assault on waste in the public sector would be waged. The coronavirus has brought attention to some of the quangos, such as Public Health England, which have performed pretty badly. PHE’s staff costs are £300 million a year. What other quangos are there with bulging salary bills and little public benefit to show for it?

There needs to be a dose of realism about wages and rents, too. Some organisations, including at least one university, have introduced wage cuts of as much as 20 per cent. This kind of wage flexibility can preserve jobs. The alternative, for many companies, will be to sack higher numbers. And the public sector should not be immune to pay cuts either.

The surge in the money supply needs to be brought under control. If not, inflation will follow and then higher interest rates. Higher interest rates could be devastating to many of those with mortgages.

In our negotiations with the European Union, Michel Barnier is trying to insist that Britain operates on what he calls “a level playing field”, by which he means the same amount of regulation that clings, barnacle-like, to the EU and has caused it to be one of the slowest-growing areas of the world. Mr Barnier’s efforts to slow us down must be rejected. We want intelligent regulation that gives enterprise every chance.

The Thatcher-style approach would take guts. It would take a willingness to face the opposition of the broadcast media, which generally has no idea of what works in economics and what does not. Above all, it would take the strength of belief that this is necessary, which is what made the Thatcher government of 1979 such a formidable force. It was a government that went on to win three elections because these policies succeeded.

Frankly, I have doubts that the current Government has what it takes to choose the second route, but it would be wonderful to be proved wrong.

Taxing and borrowing would be the economic equivalent of how the Soviet Union handled Chernobyl: denial and delay, ultimately making the situation far worse