Without bold action Britain risks sliding into an inexorable decline
There is no doubt that the Chancellor had a tough hand to play in deciding which measures to include in his Autumn Statement last month.
With inflation the primary concern, is it right to reach for the usual lever of cooling the economy with higher taxes or better to recognise the unusual features of this stagflation period and go for tax cuts and reduced government spending in tandem with sensible measures by the Bank of England if they are alive at all to the state of the underlying economy?
Jeremy Hunt chose higher taxes, the Bank of England chose higher interest rates. How these measures will reduce the price of a loaf of bread or longer-term energy bills remains unexplained.
Imposing aggressive tax increases on an economy that is teetering on the edge of a recession is a risky approach
I’m always for sound money and that government finances should be managed as we all run our own domestic affairs but there are times when we’re willing to go into the red for a greater return and a brighter future.
Obviously, the £400bn cost of Covid and the energy crisis (some of which is self-made after 25 years of energy policy failure) have made a savage dent in the nation’s finances but if we were to slip into a lengthy recession then the debt would only likely get worse and the way out even more uncertain.
From the prior mini-budget which promised £30bn of tax cuts, we have now swung wildly in the other direction to announce £25bn in tax rises. It seems to me that imposing aggressive tax increases on an economy that is teetering on the edge of a recession is a risky approach. It is hard to understate the pain that people are facing from the rise in the cost of living which in itself would take out whatever “frothy money” there may be in the economy.
Tax rises stifle economic activity and makes the entrepreneur weigh up the risks vs rewards and logically conclude it’s probably not worth it. The increase in Corporation Tax rate is a guaranteed turn-off for foreign direct investment. The energy companies’ windfall tax is deterring investment just at the time that we need to go all out for new North Sea supplies. The future and overall cyclical tax loss is obvious but the sugar rush today was too sweet to pass up.
With the cost of energy at the heart of many of the problems we are facing, support – both universal and targeted – has benefits to reduce inflation and pain. This has been the perceived orthodoxy behind the Energy Price Guarantee for domestic and business energy bills, calculated to take a good few per cent out of headline inflation. But what of fuel duty? A reduction in tax-take to European norms would have positive knock-on effects throughout the economy. A re-examination of the United Kingdom Emissions Trading Scheme (ETS) which puts British industry at a disadvantage to the EU system that we left is now overdue. It puts us at a huge disadvantage compared to other global manufacturers and raises electricity prices for households and costs for high energy consumptive businesses. The logical move for such businesses will be to offshore to more benign jurisdictions. Indeed, it is already happening.
We must look at the supply side. The government appears to have adopted a sticking plaster approach to energy which avoids examining the root causes of our current predicament. There is a refusal to acknowledge the realities of our need for fossil fuels and permit new production, driven by the unhealthy obsession with net zero. Instead, we have had the U-turn on shale gas extraction whilst signing new supply deals for fracked gas with the United States, punitive windfall taxes and a doubling down on wind power with no plan, honesty or admitting the true costs of managing their intermittency. This is a recipe for more pain. A better approach must involve increasing the supply of affordable and reliable energy.
I don’t envy the Chancellor or the Prime Minister as they grapple with challenging economic circumstances. What I would say is that the scale of these challenges demands an imaginative and ambitious response.
I worry that we are sliding into an inexorable decline that sees living standards squeezed ever more. On housing, immigration, energy and more there is a stasis borne out of timidity and a reluctance to make difficult decisions despite the obvious political popularity if bold measures were taken.
Craig Mackinlay, Conservative MP for South Thanet.
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