As published by The Mail on Sunday:
High taxing Chancellor Rishi Sunak will send UK economy crashing onto the rocks, writes former Brexit secretary DAVID DAVIS
When Rishi Sunak delivers his Autumn Budget this week, he will do so with the country facing its worst winter crisis for more than 40 years.
Rising fuel prices, tens of billions of pounds of tax increases, inflationary pressures and an environmental activist agenda for net-zero are fuelling a cost of living crisis for ordinary families.
The ears of the nation will be hanging on the Chancellor’s every word to see how he proposes to avoid the impending storm. After all, the Chancellor claims to be a Thatcherite.
I knew Margaret Thatcher, so I will watch with interest whether he can match the brilliance that Thatcher, and her great Chancellor Nigel Lawson brought to government.
Sadly, every indication so far is that his current course will take us on to the rocks – not away from them.
I fear Rishi will do so by making a most un-Thatcherite choice to persevere with raising taxes as the solution to ballooning Government debt.
After all, increases in National Insurance and Corporation Tax next year have already been announced.
Unless he changes course at the very last moment, the Chancellor will risk stoking a cost of living crisis that will ensure his legacy is more akin to Denis Healey’s Winter of Discontent than the Thatcherite Lawson boom.
No one disagrees that the enormous scale of post-pandemic Government debt requires radical action.
Driven by more than £400 billion of Covid borrowings, we have borrowed on a scale not seen since after each world war.
But raising taxes is not the answer. The tax burden is already at a level not seen since the 1940s. Increasing that burden will simply inflict more damage on the economy and lead to lower tax receipts.
NO, the way to deal with such debt levels is to do exactly what we did after the war – issue the modern-day equivalent of ‘war bonds’, to be repaid over 50 years or more.
Of course, we should have done this already, before inflation and interest rate expectations started to rise.
Once we have dealt with the debt, we can set about balancing the books, but by tax cuts – not tax increases. Taxes are harmful to the economy.
Together, high taxes and high inflation create a growing spectre that threatens our post-pandemic recovery.
The worst, however, is yet to come. The Bank predicts that inflation could rise above five per cent by early next year.
Andrew Bailey, the Governor of the Bank of England, recently said the central bank ‘will have to act’ to tackle inflationary pressure, which almost inevitably means interest rates rising.
Raising the Bank’s base rate from its historic low of 0.1 per cent will have dramatic and tangible impacts.
The Chancellor estimates that a one percentage point rise will cost the Treasury £25 billion annually – double the cost of the new Social Care Levy.
But it is not just our vital infrastructure that will be squeezed by inflation and interest rate rises. Millions of working people are already feeling pressured by rising costs.
Ronald Reagan, Thatcher’s ideological soulmate, described inflation as ‘not just high prices; it’s a reduction in the value of our money’. Inflation is a hidden tax.
With people paying more for food, more for fuel, and more for their bills, they have less money to spend elsewhere, slowing economic growth more broadly.
This problem is amplified by the Government’s disastrous decision to freeze the income tax personal allowance rate until 2026, which will only make the poorest worse off.
Compounding all this is the decision to break with the Tory manifesto pledge and increase National Insurance by 1.25 percentage points to fund the Government’s social care reforms.
This is the worst of all worlds as it fails to fix the entrenched problems with the social care sector, while simultaneously sapping £12 billion from the economy annually.
The Chancellor is also wrong to believe in paying for the Covid bill by raising Corporation Tax rates from 19 to 25 per cent.
We should incentivise businesses to thrive, not stifle them with eye-watering tax levels that have reached 36 per cent of national output.
If we want higher wages, we need higher productivity, which in turn means higher investment. Corporation tax increases will lead to less investment, not more.
Without creating a dynamic and business-friendly economy, we cannot attract companies creating the jobs of the future or capitalise on the benefits Brexit brings.
Collectively, these naive and economically ineffective policies have political consequences – not least for the Chancellor.
His favourability rating has collapsed from 52 per cent in April last year to 31 per cent today. Opposition to the National Insurance rise is growing: from 43 to 48 per cent.
Sadly this Treasury all too often reaches for expedient decisions – prioritising short-term issues over long-term stability.
The choice to fund the Social Care Levy through National Insurance rather than income tax was a typical example of the Government choosing what is easy rather than what is right.
The Institute for Fiscal Studies warned that health spending would balloon ‘from 27 per cent of day-to-day public expenditure in 1999-2000 to a projected 44 per cent by 2024-25’.
Frankly, the Treasury is too cautious and too concerned with image over substance.
The Chancellor should be governing by conservative principles rather than opinion polls.
On Wednesday he faces a choice: to pursue the politics of the 1970s through a high-tax, low-growth economy that seeks to repay the Covid debt quickly; or the politics of low-tax, high-growth that takes a long-view and allows economic freedom.
Even now, at the 11th hour, I urge him not to shy away from the challenge but to embrace it.