Sunak at risk of learning the wrong lessons

Rishi Sunak is the youngest Prime Minister of modern times, aged just 42. As our fresh-faced premier takes charge, Britain faces what he acknowledges are “profound economic challenges”.

Born in 1980, Sunak doesn’t remember the 1970s. Yet he leads a country plagued by high inflation, spiralling debts and industrial strife – as during that most political tumultuous of decades.

Wages lag price rises, sapping economy-wide spending power and broader confidence. Britain needs to break out of this post-Covid impasse – and fast.

So why are government insiders warning of a “painful” stealth tax raid? This is the wrong strategy at the wrong time – and could backfire badly.

Higher taxes now risk stalling the economy – resulting in less government revenue, making the public finances even weaker. Ahead of the Autumn Statement on Nov 17, Sunak should change his tune.

The UK’s tax burden, the share of the economy accounted for by tax receipts, is already heading for 36.5pc – the highest since the early 1950s. Fleecing hard-pressed families and firms yet more could plunge Britain into a deeper slowdown, provoking renewed financial turbulence, making a bad situation worse.

Consumer confidence plunged last month, as households grappled with soaring food, energy and mortgage costs. Evidence is mounting that the economy is shrinking fast. The respected CIPS index, based on repeat surveys of private commerce, hit 47.1 in October – a 21-month low and the third sub-50 reading since August, suggesting we’re on the brink of recession.

The manufacturing-specific measure was even lower, at 46.2. A sector generating one in five jobs and almost half our exports is now at its lowest ebb since mid-2020, the depths of lockdown.

As central banks worldwide increase interest rates to tackle inflation, the global economy is slowing. The Bank of England raised its base rate by 0.75 percentage points to 3pc last Thursday – the eighth increase in a row and the biggest one-off rise since 1989. The Bank also issued gloomy forecasts, suggesting Britain is already in a recession that could last until mid-2024.

Sunak’s answer to these challenges is to make the UK’s tax burden – already heading for a 70-year record – heavier still. Government sources say across-the-board tax hikes are “inevitable” when Chancellor Jeremy Hunt makes his Commons statement on Thursday week.

“It will be rough,” says one insider, indicating ministers will extend the current freeze on tax thresholds from 2026 until 2028. Millions more workers on modest incomes will be dragged into higher tax brackets – costing countless families hundreds of pounds a year. How will that rebuild shattered consumer confidence and get the economy moving?

While interest rates remain low by historic standards, indebted consumers are suffering just as in previous decades. When rates were 15pc-plus in the late 1980s, households spent an average of about 30pc of their incomes on mortgage repayments.

That ratio is now similar, even with rates at only 3pc, because homes these days are so much more expensive. And today’s mortgage-holders – ordinary families, trying to buy a home – will likely face higher borrowing costs yet. The last thing they need is income stealth taxes.

The UK’s small and medium-sized enterprises (SMEs) are also in the firing line – not least from Sunak’s impending rise in corporation tax from 19pc to 25pc. SMEs drive the British economy, creating over half of our GDP and two thirds of employment.

Having been hammered during lockdown, taking 6pc off the stretched profit margins of countless such firms will finish many of them off. Few policies are more likely to discourage growth. Far from raising revenue, this corporation tax hike could cost the Government money.

The upcoming Autumn Statement is being presented as a corrective to the mini-Budget proposed by then prime minister Liz Truss and chancellor Kwasi Kwarteng last September. On leaving office, Truss insisted: “The UK has been held back for too long by low economic growth.” She was right. “We simply cannot afford to be a lowgrowth country where the government takes up an increasing share of our national wealth,” Truss continued. Right again.

The mini-Budget wasn’t “extreme”, “libertarian” or “grossly irresponsible”, as many now claim. Proposals to freeze corporation tax, lower national insurance contributions and shave a penny off income tax next year were, in themselves, entirely reasonable. Even cutting the top rate from 45pc to 40pc, while politically ill-timed, was far from radical. That same tax rate was 40pc throughout Tony Blair’s decade in No10.

The mistake Truss and Kwarteng made was to do too much, too soon, and without warning. With financial markets concerned about the cost of the Government’s energy price cap, and the Bank of England selling debt, that was enough to cause a panic. But it was the woeful packaging and timing that roiled the gilts market, not the individual policies themselves. The mini-Budget, in sum, was an attempt, after a two-decade upward trend, to lower the tax burden from a record 36.5pc of GDP to 36pc – where it was in 2021. That is not an outlandish aim.

Yes – the disastrous handling of the measures sparked currency and bond market volatility, but the measures themselves weren’t the underlying cause. To suggest otherwise is politically disingenuous – and ignores the long-term trend of a strengthening dollar and rising interest rates globally.

And I don’t buy this notion that stringent tax rises are necessary now because Truss and Kwarteng have left us in such a mess, with markets rattled. The 10-year gilt yield, at the time of writing, is just below 3.5pc – roughly where it was the day before the mini-Budget.

It would be wholly wrong to scrap the central Truss-Kwarteng aim of reducing the UK’s growth-sapping, record-high tax burden. Such policies should instead be introduced more slowly and steadily, but firmly, reassuring investors and keeping financial markets onside, while convincing a new generation of voters this is the way to go.

What rescued Britain then wasn’t higher taxes, sluggish growth and even more state spending. It was leadership – with Margaret Thatcher championing lower tax and a smaller state, while doggedly battling vested interests and slashing regulation so the UK economy could grow. It’s a lesson from history Sunak must not ignore.

‘A stealth tax raid is the wrong strategy at the wrong time – and could backfire badly’