Sunday, July 10, 2022
PMs and chancellors change - but economic reality remains
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission

I do not expect much sympathy but spare a thought for those of us who must write an economics column, with a deadline, in current circumstances. Every few minutes I have had to pop away from my desk, not to see what is happening in the tennis, but to see whether the person just appointed chancellor is still chancellor and, if so, how long that is likely to be the case.

Rishi Sunak is definitely no longer chancellor, having resigned a few days ago after two years and just under five months in the job. In his resignation later, he said he was leaving what could be his last ministerial job, though it would not be a huge surprise if he were back at some point, possibly even as chancellor under a new prime minister, if he does not get the top job himself.

That would be no bad thing. Two years or so is not long enough to create a legacy as chancellor. His great hero Nigel Lawson, who also resigned having found it impossible to work with 10 Downing Street, was chancellor for more than six years. Sajid Javid, Sunak’s predecessor, had an even shorter time, never even presenting a budget. Neither should be lost to the country.

I found Sunak to be engaging, outgoing, intelligent, hard-working and with a curiosity and hunger for new ideas. He was very keen on something I wrote, explaining how cuts in the corporation tax rate had not prompted an increase in business investment, which helped him with the argument for increasing the tax.

His response to the pandemic, including the furlough scheme, something we had never seen before, was swift and sure-footed. It was no accident that this response was put in place at a time when Downing Street was preoccupied by the health challenges of the pandemic.

It was only later that the “fundamentally different” approaches Sunak referred to in his resignation letter came through. His aim was to fix the public finances first and cut taxes later, taking his leaf out of the Thatcher government in the 1980s. The tax burden rose for its first few years but fell later.

It was not illogical. The Office for Budget Responsibility (OBR), in its latest ‘Fiscal Risks and Sustainability’ report, thinks government debt will edge lower relative to gross domestic product in coming years. The former chancellor, in the OBR’s view, had some room to cut taxes later in this parliament, roughly £30 billion. He had reason to think that he could go well beyond the promised 1p cut in the basic rate of income tax.

The trouble with his strategy was that it involved raising taxes substantially now, lifting the tax burden to new highs. And the trouble with that, as the OBR pointed out, is that cancelling tax increases that were already in the bag for the future public finances more than removes that room for manoeuvre. Sunak’s big three tax hikes: raising corporation tax from 19 to 25 per cent next year, freezing income tax allowances until 2026 and raising employee and employee national insurance, will between them be raising more than £50 billion a year in additional revenue by 2024-25.

As it is, for now at least, Sunak leaves the Treasury as the instinctive tax-cutter who, largely because of the pandemic, become a big tax-hiker. Every chancellor leaves office with regrets, with a huge amount of unfinished business, but his bulging file of unfinished was bigger than most. His resignation was pivotal to the unseating of a terrible, chaotic prime minister, who was never suited to high office, but that may not be comfort enough.

His successor for now, Nadhim Zahawi, is somebody I know, but not as a politician. Before he ventured into more controversial oil businesses, he was one of the two founders of YouGov, the polling organisation. The other was Stephan Shakespeare. There is a certain neat symmetry in the fact that Zahawi’s parliamentary constituency is Stratford-upon-Avon.

Both worked for Lord (Jeffrey) Archer, when he was running to be London mayor in the late 1990s, before scandal intervened. The business that became YouGov, internet polling, was originally intended to provide instant democracy, with Archer testing his ideas on the public. The Sunday Times began to use YouGov in the early 2000s, at a time when many people were sceptical of internet polling, and I was responsible for it on the paper. Times have changed. Out initial polling was to gauge whether there was public enthusiasm for the UK joining the euro, at the time the hot political topic of the day.

Zahawi did well with YouGov, and he has done well politically over the past couple of years, first as vaccines minister, then education secretary, now chancellor.

Interviewers have been desperate to get him to commit to early tax cuts, but he has been commendably guarded on that. He has got out of, I think, having to deliver a big economic speech alongside Johnson shortly, though you never know. In theory there should be no big political announcements during the period when the Tory party is selecting a new leader, particularly if Zahawi enters the contest himself, but you never know about that either.

The problem for the new chancellor is the same as the problem for the old chancellor. Inflation is at a 40-year high and is going higher. For the next 12-18 months there will be no growth in the economy, at best, and there is not much that can be done about that.

Tory MPs and party members want tax cuts, but they also want fiscal disciple – control over government borrowing and debt – and extra spending on the NHS backlog, new hospitals, levelling-up infrastructure, and so on. They would rather teachers and other public sector workers did not go on strike and that the country worked better than it is now.

Economics is sometimes defined as the allocation of scare resources and there is a strong element of that in the job of chancellor, which is to try to reconcile competing and apparently irreconcilable demands. The new chancellor could make himself popular with the Tory faithful by scrapping all Sunak’s planned tax increases and, for good measure, announcing a temporary cut of 5 percentage points in VAT or income tax.

Temporary broad-based tax cuts would, however, add to and prolong the UK’s inflation problem and be poorly-targeted. Not proceeding with the announced tax increases, including corporation tax, may have appealed to an innumerate prime minister but should not be contemplated by a chancellor, unless there are alternative ways of funding it. “Cakeism”, wanting to have your cake and eat it, should be out of the door too.

The more borrowing and the more debt there is now, the more that the country will run into the demographic and other pressures which, as the OBR highlighted, face this country over the next 50 years, and which will push up government debt to what is says are unsustainable levels.

As for Sunak, his best moment was probably his Mais lecture at City University in February. It provided a diagnosis of the many weaknesses in the UK economy that he hoped to fix, including lower business investment and much less spending on skills than competitors.

He was also clear on tax, saying: “I am disheartened when I hear the flippant claim that ‘tax cuts always pay for themselves’. They do not. Cutting tax sustainably requires hard work, prioritisation, and the willingness to make difficult and often unpopular arguments elsewhere. And it is hard to cut taxes at a time when demands on the state are growing.”

It is a quote to be pinned up on every chancellor and MP’s wall.