As published in PoliticsHome:
The Chancellor should use a bold first Budget to fix idiocies in the tax system, absorb the shock of the coronavirus and get Britain match-fit for Brexit, argues David Davis.
Rishi Sunak must be getting used to surprises, first with his sudden appointment as Chancellor, now with the extraordinary circumstances for his first Budget created by the global and domestic backwash of the coronavirus. Few first Budgets can have been so dramatic.
There are numerous problems to address. First, the supply side shock of the virus, essentially cutting the whole world’s ability to work, putting a huge break on global output. There is no economic answer to the problem, only ways of mitigating its consequences. He will need to ensure that a cash flow crisis does not obliterate otherwise healthy businesses and turn a temporary economic problem into a permanent one.
This will mean tax holidays, deferral of IR35, underwriting bank loans to affected businesses, and some direct cash payments to badly hit regions or industries – as well as the NHS. This requirement is likely to last less than a year, and so he can ignore EU state subsidy rules on it for the moment and argue about it in court later if need be.
But he should not let the immediate crisis stop him dealing with the fundamental problems intrinsic to the current economy. Over a decade of austerity has left us paying far too much tax. Our tax burden is the highest for almost 50 years.
He should lighten the load and use the opportunity to correct some of the existing idiocies in our tax system. For example, the complexity of taxes on pensions have meant that they have become accidentally confiscatory. The doctors who refused to work because they were effectively paying over 100% tax were only one category of people hit by the so called “taper”.
Architects, engineers, business managers, are all hit by what was described as “one of the worst examples of unnecessary complexity in living memory.” He will be advised to fiddle with it. Instead, he should simply abolish it.
He should apply a similarly sceptical eye to the stamp duty regime, which again seems to punish all the wrong people. And certainly, no mansion tax. Then when he has eradicated the worst anomalies, he should consider an economy boosting general tax cut, on either corporation tax or income tax or both.
In truth, this is one Budget where it would be reasonable to have no tax increases at all. This will go against the advice he gets from the fiscally conservative Treasury, and from some commentators.
But this is not a time to earn the soubriquet “Spreadsheet Sunak”. Even before the Coronavirus, the state of the global economy was leading even the high priest of austerity, Professor Ken Rogoff, to advise Britain to deficit spend through the Brexit years. If we ran a 1% or so deficit it would still be small beer by comparison with the American $700 billion plus shortfall.
What we should not do is fiddle with the Treasury rules to justify this, trying to classify more current account spending as “investment”. That is what Gordon Brown did, and it led to disaster.
Because the long term interest rates are so low, and because our infrastructure is historically underinvested, there are powerful economic arguments for borrowing on the capital account to invest in really worthwhile projects across the whole country – rail, road, broadband, flood defences – which will more than repay their capital. But we should be rigorous in insisting that they meet the requirement of being economically useful, not just politically desirable.
MATCH-FIT FOR BREXIT
There is also a great deal that he can set up for the medium term. He has to help get the country match-fit for Brexit. New deals to encourage research and tax breaks to encourage exports, should be high on the agenda. We are still one of the best places in the world to do business, and he should reinforce that reputation.
In doing so, he should ignore the whinging of the European Commission. It always struck me as amusing that the Commission complained about “unfair competition” when their President, Jean-Claude Juncker, had been both Prime Minister and Finance Minister of Luxembourg, which has long been one of the EU’s leading tax havens, with Ireland and the Netherlands. So we should ignore them and do what is squarely in the national interest.
Brexit also creates some unusual short-term opportunities. For example, despite huge Foreign Direct Investment into the UK in the last few years, there has been a reluctance on the part of Britain’s big corporates to invest until they knew how Brexit would turn out. This means that there are a lot of industrial capital projects waiting to be initiated, and a lot of unspent money on British balance sheets.
It would not be too difficult to devise a short-term tax regime to turn on the taps and get business to release the cash for these projects.
‘TRUST YOUR INSTINCTS’
This week the old Governor of the Bank of England, Mervyn King, published a book called “Radical Uncertainty.” You could summarise the thrust of this very erudite economic analysis as: “Don’t believe the bogus precision of the official figures, trust your instincts.” That is what Sunak should do.
On the Thames Embankment there are a number of statues of our greatest and most successful generals. Under one of them, inscribed in the stone, it says “Often boldness is the safest course.”
Tomorrow Chancellor Sunak should take that as his guide and deliver a Budget that does not just deal with the current crisis, but also grasps the real opportunities that the next decade will present to our country. If he does, then he could be our Chancellor Lawson for the new age.