Instead, much of the party fell in love with Manna of Heaven’s economic theory: that growth is a given, that prosperity and jobs just happen, and therefore people and companies can be taxed to ensure “fairness” or “equality” with no economic consequences. In this absurd worldview, taxation is a purely political choice, a tool to buy voters or signal virtue, not a driver of economic success or failure.
In the past, the Conservatives have tried to cut taxes overall because they believed in a causal relationship between a larger private sector and faster GDP growth. Johnson, unfortunately, plans to permanently increase spending by two percentage points of GDP and taxes by one. He’s a big government Tory, who believes a lot of his extra spending will directly make the UK richer, and that’s the real reason – not Covid – that explains why Sunak felt obligated to ‘go against his own instincts and raise taxes. He did.
Unless he changes his mind before the next election, Johnson will be remembered as one of the few Tory prime ministers – along with John Major, David Cameron and Alec Douglas-Home – to have raised taxes as share of the economy. They fell heavily during Winston Churchill’s second term and under Harold Macmillan, Anthony Eden, Edward Heath and Margaret Thatcher. In contrast, Blair and Wilson dramatically increased the share of national income confiscated by the state, according to the Taxpayers Alliance.
Sunak has at least beaten supporters of the Magic Money Tree, who believe that budgets never need to be balanced or that money can be borrowed indefinitely to fund unlimited spending. But that’s not to say that corporate tax hikes and stealthy income tax hikes were the answer: it would have been better to find savings in non-Covid running costs over time; or to break the conservative manifesto, evoking the urgency of the Covid to increase VAT. It bears repeating that the main problem facing public finances in the long run is not the economic scars of the pandemic, but the fact that the Tories are determined to continue to increase spending as if Covid had never happened. never produced.
Sunak’s raid on big business will take corporate tax revenues to their highest level since the height of Lawson’s boom, when profits were artificially inflated. This is the wrong signal to send to multinationals and entrepreneurs, most of whom are still afraid of Brexit. The capital expenditure super-deduction will boost investment, but only for two years. The marginal effective corporate tax rate in the UK is already higher than that of the Brics countries and all other G7 members except France; after the Sunak raid, our own rate will almost certainly be higher, giving François Mitterrand and Jacques Delors the last laugh.
The UK already levies much more corporate taxes than other countries, as Douglas McWilliams of the CEBR points out. In 2018, Great Britain received 8% of its revenue from corporate levies despite an overall rate of 19%. France only collected 4.6% of its total with a rate of 33% and Germany 5.6% with a rate of 30%. Overall rates are psychologically important, but capital deductions and other exemptions matter enormously when it comes to the actual bill, and therefore companies’ decisions to locate their operations in a particular country. The verdict of the Office for Budget Responsibility is damning: the cost of capital will rise, which will drastically reduce business investment when the super-deduction expires. This can only mean lower productivity and lower wages.
The Reaganomics is over in Britain, dead and buried, as is much of the economics of Thatcherism. Paradoxically, Johnson, who likes to quote Ibn Khaldoun, the 14th-century Tunisian scholar who was one of the true inventors of the Laffer curve, felt it necessary to turn his back on the legacy of the 1980s on the supply side. Until recently, the Prime Minister believed in increasing the threshold at which the 40 pence tax rate begins; now it does the opposite in real terms.
It was an inevitably bad budget that will haunt the Conservatives for years to come.