Stonking recovery means Sunak should forget about tax rises

 The Chancellor should remove the threat of higher charges on companies and consumers and let the economy roar back from Covid at warp speed

Source - Daily Telegraph - 22/05/21

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The roaring Twenties. The post-pandemic boom. The Covid crash. At this rate even the most imaginative pundits and headline writers are going to exhaust the supplies of synonyms to describe the British economy.

Retail sales growing at 9.2pc, the fastest rate on record, are just the start of it. The jobs market is resilient, wages are rising, investment is starting to flow and even our trade with the rest of Europe is recovering. Growth is turning out to be a lot stronger than anyone expected even a few weeks ago.

But hold on. The Chancellor is still basing his plans to raise taxes on forecasts from the Office for Budget Responsibility that are now hopelessly out of date. By the end of the summer, the Treasury is going to be overflowing with unexpected revenues, yet there are still hefty rises in taxes coming down the track that will choke off the recovery, stoke inflation, and make it harder to build a competitive post-Brexit economy.

Rishi Sunak should cancel those hikes, pledge that there will be no further tax rises for the length of this Parliament and let the post-Covid recovery rip.

The pandemic may have changed the way we all behave in some ways. But there is one constant in the British character that can always be relied on. We love to head down to the high street to hammer our credit cards. After being locked down for months, our first response to the easing of restrictions was to spend, spend and then spend some more.

Estimates of a 4.5pc rise in retail spending for the month turned out to be far too pessimistic. According to the Office for National Statistics, retail spending grew by a whopping 9.2pc month-on-month, led by non-food store sales up by a mighty 25pc. There is no reason to think it will end there. The economy only partially reopened in April, and early indications from card transactions suggest that the boom carried on in May.

Overall GDP growth may get close to double figures for 2021. Goldman Sachs has pencilled in 8pc, and that is already looking on the low side.

Here’s the catch, however. The Chancellor has set out plans for hefty tax rises to pay for the pandemic. A steep rise in corporation tax to 25pc is the most dramatic. But his last Budget also included plans for a freeze in personal allowances, in inheritance tax thresholds, in capital gains tax exemptions, and in the threshold for the higher income tax rate.

Even the phasing out of the stamp duty break in September is really an increase in the amount the Treasury takes out of the economy. Such fiscal tightening is a huge miscalculation. Here’s why.

First, and most obviously, we don’t need to lift taxes any more. Growth is shaping up into a bonanza for the Treasury. Strong retail sales, especially of non-food items, mean lots of extra VAT. More shop and bar staff to serve all those customers mean more income tax and NI.

Rising house prices mean more stamp duty, even with the exemption in place, and if companies are making more money they will be paying more in corporation tax as well. And overall, the UK’s debt ratio will be modest compared with much of the rest of the world.

Next, tax rises will choke off the recovery and fuel inflation. After staying at home for months, everyone is bored out of their minds, and many have plenty of cash in the bank, so it is no great surprise they are starting to spend again. Come the autumn, however, and they will be beginning to fret about what all those tax rises will do to their savings.

Despite the investment deduction, company directors will be worrying about that higher rate and reining in spending. Even worse, higher corporate tax rates are quickly passed on to consumer prices, and that will happen when inflation is starting to edge worryingly higher.

Finally, the UK needs to create a competitive post-Brexit economy. There are lots of elements to that from smarter regulation, to flexible labour laws, to state-of-the-art trade deals. But we also need to be honest – low tax rates are a key part of the UK’s pitch in a world where every country is competing for global investment. If we keep our corporate rate at the planned 19pc it will be a huge strength.

If the Government does find itself with an extra hundred billion to play with, the Prime Minister will have lots of brainwaves on how to spend it. And there will be a case for upgrading infrastructure, transitioning to green energy, and levelling up the regions.

Even so, chancellors are not meant to raise taxes just for the fun of it, and especially not Conservative ones. The best thing Sunak could do right now would be to remove the threat of higher taxes from companies and consumers, and let the economy roar back from Covid-19 at the maximum possible speed.