Sunday, February 21, 2021
Sunak shouldn't even think of doing a Geoffrey Howe
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

This is a time for momentous anniversaries. It is ancient history now, particularly for younger readers, but a few days ago we market the 50th anniversary of decimalisation. It is surprising, unless I have missed it, that we have not had a campaign to bring back pounds, shillings and pence, not that I am suggesting it would be a good idea.

And, while we have embraced metrication – not the same as decimalisation but part of the family – we still measure distances in miles, fuel consumption in miles per gallon, height in feet and inches (well I do) and beer, when we used to be able to drink it in pubs, in pints.

It is, however, another anniversary I wanted to remind you of today. Forty years ago next month a Tory chancellor presented a budget in difficult circumstances. Government borrowing was high, though at 4.3 per cent of gross domestic product (GDP) in 1980-81, it looks like small change these days, but the economy was in its deepest recession since the Second World War
The consensus was clear on what that chancellor, Sir Geoffrey Howe, should do, and it was not to raise taxes, which you did not do in the teeth of a recession. But he did, aggressively, with a new tax on North Sea oil, a one-off windfall tax on the banks, which were benefiting from the government’s high interest rate policy, and big increases is excise duties, including those on petrol. Toughest of all, for a supposedly tax-cutting government was a freeze on allowances at a time of very high inflation, increasing income tax on everybody.

The budget produced the now famous or infamous reaction in the form of a letter from 364 economists, including a much younger Lord (Mervyn) King, warning that it would deepen the recession. Margaret Thatcher, challenged by the Labour leader Michael Foot to name two economists who supported her policies, snapped back Alan Walters and Patrick Minford, before saying in private in the car taking her back to Downing Street: “It’s a good job he didn’t ask me to name three.”

The letter from the 364 has been much mocked because the spring of 1981 marked the start of the long 1980s’ recovery, though unemployment continued to rise for years and was more than three million six years’ later. The 364 had failed to spot that Howe’s fiscal tightening masked a big monetary relaxation, including a two percentage point cut in interest rates; chancellors could do that in those days.

Anyway, forty years on, Rishi Sunak is facing a dilemma similar to his predecessor, except that all the magnitudes are so much bigger. The budget deficit this fiscal year, 2020-21, will be not far below 20 per cent of GDP, a figure that would have been unimaginable to his predecessors, though figures on Friday suggested that the deficit will come in well below the feared £400 billion.

The economy has had the deepest recession, not since the Second World War but since before the War of Jenkins’ Ear. Not for more than 300 years have we seen anything like last year’s 9.9 per cent slump in GDP. And, while the worst of it is behind us, and happened in March and April last year, the economy is back in a period of declining GDP in the current quarter.

Even as the economy pulled back from the worst at the end of last year, the economy was 7.8 per cent below pre-Covid levels, with consumer spending down 8.4 per cent and business investment 10.3 per cent
Some of the old tunes from 1981 have been playing. There has been talk that Sunak, like Howe, could announce a stealth increase in income tax by freezing allowances, though at a time of low inflation the impact would be a lot less now than then.

A windfall tax has been mooted, this time on businesses that have done well out of the pandemic, as have increases in corporation tax, capital gains tax (by aligning it with income tax) and pensions’ taxation, by reducing or reforming higher rate pension tax relief. An online sales tax, also unimaginable for Sunak’s predecessor 40 years ago, has been mooted. So have green taxes.

One thing, however, has not changed. Economists are just as certain now as they were then that this would be a very bad time to raise taxes. This applies across the spectrum, from those who think tax increases are always a bad idea, to those who think they will be necessary in time, but that this would be a terrible time to do it.

The Institute for Fiscal Studies (IFS) in its pre-budget assessment a few days ago, fell into the latter category. While it thinks hefty tax rises - £60 billion – will eventually be needed to put the public finances on a sustainable footing, it also believes that is something for later.

As it put it: “Sizeable net tax rises – to help meet likely demands for additional public spending and make-up for any enduring weakness in revenues, while keeping inflation low – will be needed at some point. But substantial tax rises should not be part of the coming budget. Mr Sunak should only commit to permanent spending rises (or for that matter tax cuts) if he is sure of an appetite for larger subsequent tax rises.”

Neil Shearing, chief economist at Capital Economics, in a paper for Chatham House, the international affairs think tank, says that the priority for governments, including the UK, is to “stay the course” and not engage in premature fiscal tightening, including tax hikes. Countries should also better co-ordinate their response to ensure a sustained global recovery, he argues. Such co-ordination, absent in the Trump era, has a better chance now.

And, while the chancellor has understandable concerns about the record government borrowing on his watch, he can be reasonably relaxed about that for now, Shearing argues. “The key point is that with interest rates kept low by ultra-loose monetary policy, bond yields are likely to stay below the rate of nominal GDP growth in most major economies over 2021–22,” he writes. “In these conditions, it is unlikely that public debt ratios will spiral out of control.”

Will Sunak ignore the advice of economists and “do a Geoffrey Howe” in his budget on March 3? He would not be the first Tory chancellor to follow in his predecessor’s footsteps. George Osborne incurred the wrath of many – not all – economists in embarking on austerity in 2010.

I suspect that the current chancellor will, though, continue in the vein he has pursued since taking on the job a year ago, that of supporting the economy, and jobs, during a difficult time. That has to be right. People are beginning to look at the sunlit uplands that lie beyond the lockdown. The latest GfK consumer confidence index, published on Friday, showed a five-point increase, albeit to a still quite weak -23. People have become less gloomy about the economy over the next 12 months and in net terms are positive about their own personal financial situation.

The optimism is still fragile and should not be snuffed out by premature tax hikes. Sunak says he wants to be honest with people about the state of the public finances and the need to restore them over the medium term. That is fine. But now is too soon.