Tories must be bold and reduce tax burden

Last weekend, I had lunch with Lord Lawson at his home on the south coast. The former chancellor, who bestrode the Treasury from 1983 to 1989, has just turned 91.

Remaining sharp, and politically astute, Lawson had plenty to say ahead of this week’s Budget – about economic policy and the future of the Conservative Party.

He describes the UK tax burden – now heading above 38pc of GDP, a 70-year high – as “undesirable and unsatisfactory”. And with Britain seemingly locked onto a high-tax, low-growth trajectory, Lawson sees little evidence that this Government will restore the country’s fortunes.

“I don’t think there’s anything new to come from the Conservative Party as it now is,” he says. “It’s going to have to reinvent itself – and I don’t see that coming soon”.

Describing Rishi Sunak as “a good guy, the right choice under the circumstances”, Lawson doubts the Prime Minister will implement bold, pro-growth policies. “I don’t think he is going to be known for his tax cutting,” he says.

Lawson’s first budget in 1984 was set against the backdrop of economic stagnation and industrial unrest. Embarking on what he called “a radical programme of tax reform”, he immediately cut corporation tax from 52pc to 50pc and lowered employers’ National Insurance contributions.

By the time he left No11 five years later, the basic rate of income tax had fallen from 30pc to 25pc, with the top rate slashed from 60pc to 40pc and corporation tax down to 35pc.

As such, Lawson was the macroeconomic architect of Thatcherism, implementing enterprise-boosting policies throughout the 1980s that rescued Britain from the statist torpor of the previous decade, paving the way for the growth of the 1990s. That’s why his words matter, ahead of Wednesday’s Budget, for the UK economy is at a crossroads, with Sunak and Chancellor Jeremy Hunt facing a definite choice.

The Government could stay on the path of ever-rising taxes, persisting with the freeze in income tax and higher rate thresholds until 2028 as planned. That’s expected to double the number of those paying tax at 40pc to 8m over the next five years, as inflation and wages rise while the annual earnings threshold stays around £50,000 – a profoundly antiaspirational “stealth tax”.

It could also press ahead with plans to raise corporation tax from 19pc to 25pc – slashing firms’ margins by a huge 6 percentage points at a time when so many are still struggling.

Or Sunak and Hunt, taking their cue from Lawson, could be bold. The reality is the economy has proved remarkably resilient with recent forecasts issued by HM Treasury, the Office of Budget Responsibility and the Bank of England now looking much too gloomy.

I wrote last week about the “green shoots” of growth emerging in unofficial survey data over recent months – a view borne out by GDP figures released last Friday. The UK economy grew 0.3pc in January, way above expectations, in contrast with the 0.5pc contraction the month before.

While Britain has so far dodged recession, though, this recovery is extremely fragile. Between November and January, the economy was flat – registering no growth.

The services sector was relatively buoyant in January, expanding at 0.5pc, with consumers sensing inflation is receding and interest rates may soon peak. Transport and storage services expanded 1.6pc, in part because there were fewer train strikes than the previous month.

But production fell 0.3pc, with manufacturers still grappling with energy costs and labour shortages. And construction activity dropped 1.7pc, with the housing market going through a rough patch and too many infrastructure projects stalled.

All the more reason for the Government to nurture the economy’s green shoots on Wednesday, rather than stamping on them by sticking with tax rises that make no sense.

While campaigning to be Tory leader last summer, Hunt said it was the “pro-business climate” created by Margaret Thatcher and Lawson during the 1980s that persuaded him to “set up in business and take risks, to start with nothing ... and build something that ended up being a success”.

Hunt’s pitch for the premiership stressed that, as an entrepreneur who made his fortune before politics, he was uniquely placed to get the British economy moving.

Not only did he pledge to reverse the planned rise in corporation tax, but cut it to 15pc, the lowest of any major economy. “We need to start up Britain now,” he declared. “To send a signal the UK is the most pro-business economy in the world”.

All that is still true now, only more so. The public finances, while still weak from lockdown, are far stronger than last September, when the mini-Budget sparked turmoil on the gilts market. Ongoing growth and falling wholesale energy prices mean the Government has spent far less than expected on energy subsidies and debt interest, with tax-revenues outperforming.

The National Institute of Economic and Social Research points to £166bn in fiscal headroom, predicting a budget surplus next year. And keeping corporation tax at 19pc is anyway more likely to boost rather than cost the Treasury revenue, given the positive impact on investment and growth.

Lawson agrees that corporation tax “should stay where it is – we shall see”. He urges today’s Tories to learn from his generation of conviction politicians. “I don’t want to sound boastful in any way, but I think there’s little doubt our policies were, not faultless, but successful”.

He says the combination of excessive money-printing and inflation complacency means the leadership of the Bank of England “has been going wrong slowly, for a long time”. Lawson describes Mervyn King, who left the Bank in 2013, as “a particularly good governor”, but adds: “I don’t think since his time the Bank’s performance has been particularly great.”

It is at the top of the Tory party, though, where the words of this much-admired political legend will resonate most.

“Thatcher was the best leader that the country has had and the Conservative Party has had since Churchill,” he told me last weekend. “And I hope to be remembered as a leading member of a government which changed everything in this country, not just economically, but embracing that and going further”.

‘The reality is the economy has proved remarkably resilient with recent forecasts looking much too gloomy’