The tax cuts and welfare reforms made this a truly conservative fiscal event, but it must be just the start
Source - Daily Telegraph
Early last year, Rishi Sunak was telling us that National Insurance and corporation tax needed to be increased savagely. Some 18 months later, his Chancellor is slashing National Insurance and reversing part of the raid on company profits.
It was John Maynard Keynes who said “when the facts change, I change my mind – what do you do, sir?”. I’m no Keynesian, and I cannot see how either the facts or the rules of economics have altered over such a short period, but let’s not be churlish.
The Autumn Statement is a big step in the right direction for which Sunak deserves to be congratulated. It represents not so much a conversion for the Prime Minister as a welcome return to his intellectual roots, a restoration rather than a revolution, the next stage in a journey that started when he toned down net zero, slashed HS2, ended the war on cars, and will hopefully soon see him tear up the rules preventing the Government from stopping illegal migration.
Whisper it quietly, but Jeremy Hunt, with Sunak’s approval, is adopting most of the core tenets of Trussonomics, albeit in adulterated fashion and delivered in a very different style. We need more economic growth, and the only way to achieve that is to cut tax on labour and capital, slash public spending, reform welfare and encourage enterprise and risk-taking.
I wish Hunt could have gone a lot further, but his plan amounts to the first properly conservative fiscal statement in years – or at least the first that will actually be implemented, as Kwasi Kwarteng’s mini-Budget, sadly, died on arrival.
The best move in the Autumn Statement was the two-point reduction in employee National Insurance contributions from 12 per cent to 10 per cent, aimed at boosting those of working age. The self-employed are also being helped.
The decision to make full expensing permanent within the corporation tax system will encourage private sector investment, though it would still have been better not to have increased the tax on company profits in the first place. The Growth Commission, a new free-market modelling think tank, calculates that cutting corporation tax back to 19 per cent would have delivered double the growth effect of the Autumn Statement’s full expensing measures.
Hunt’s welfare reforms are excellent, reintroducing a modicum of rationality and fairness into a morally bankrupt system. Combined with the Chancellor’s previous changes to benefits, the Office for Budget Responsibility (OBR) believes that employment will rise by 200,000 thanks to his reforms, a great result given how establishment modellers are always so reluctant to price in positive supply-side effects from Tory policies.
Last but not least, Hunt is rightly squeezing public spending, at least if we are to believe his forecasts: by keeping nominal rises to low levels, higher inflation will help cut the size of the state from 44.8 per cent of GDP today to 42.7 per cent by 2028-9, assuming that these post-election spending plans actually materialise. This will also hopefully jolt our broken public services into pushing through some productivity improvements.
So much for the good news. The tragic reality, however, is that Hunt’s statement can’t undo the social-democratic disaster of the past few years, the drift to statism and the catastrophic lack of imagination by a Conservative Party – including too many backbenchers – who have almost entirely forgotten the lessons of the 1970s and 1980s.
Even with the supposed real terms spending cuts pencilled in by Hunt, state expenditure would remain 3.1 per cent of GDP higher than pre-Covid by 2028-29. This is a calamity: high levels of government spending will be a drag on productivity and on growth. The OBR predicts the economy will grow by a miserable 0.67 per cent this year and, because of weak productivity and very high levels of immigration, GDP per capita will actually fall by 0.3 per cent. We are still getting poorer, on average.
Tragically, those of us who spent years worrying about the Tories’ statist drift since the 2000s, and who warned that lockdowns would permanently resocialise the British economy, have turned out to be right. It wasn’t possible to put an economy into a deep freeze without crippling it; one couldn’t shower free money on the public and expect attitudes to welfare dependency not to soften; it was absurd to hope that massively expanding the money supply wouldn’t lead to inflation.
Libertarian and Austrian economists were right, and we are now going to pay the price for years to come for our technocratic class’ dreadful litany of errors. The Tories will have massively boosted the size of the state during its 14 years in office, undermining the kind of society it claims to believe in. In fairness to Sunak, he saw a lot of this coming in 2020 during Covid, but he will need to do more in the run-up to the election to regain the trust of his core electorate.
It’s not just spending that remains extraordinarily high: the tax burden will hit a post-war high of 37.7 per cent of GDP in 2028-9. Turbocharged by massive fiscal drag caused by the freezing of tax thresholds, income tax is turning into a monster devouring ever more of our incomes. Hunt’s 2p cut to National Insurance will only return one pound out of every four raised through changes to income tax or National Insurance since March 2021; this will still be the most tax raising Parliament of modern times, the Institute for Fiscal Studies calculates.
The income tax yield will increase by stealth from 10.2 per cent of GDP this year to 11.3 per cent by 2028-29; 4 million people will start to pay income tax for the first time; 3 million taxpayers will be moved to a higher band and an extra 400,000 will pay the additional rate. Hunt’s atrocious decision to lower the 45p rate threshold to £125,000 still stands, and the entire income tax system is plagued by abominably high marginal tax rates over certain income levels, penalising effort and punishing hard work.
Hunt’s Autumn Statement contains a raft of excellent policies but the reality is that we remain trapped in a world designed by Gordon Brown. The Spring Budget will need to deliver even greater fireworks if the Tories want to be able to credibly claim to provide a genuine alternative to Keir Starmer’s high-tax, low-growth vision for Britain.
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