Rishi Sunak cares more about political posturing than good policymaking
This really is the confused Chancellor.
He is desperate to burnish his Hayekian credentials to his Conservative colleagues, using modest tax cuts now and in the foreseeable future to try and help households with soaring inflation.
But the truth is that he has been consistently Keynesian in his response to two major crises – Covid and now Ukraine - during his short tenure. He has used a mixture of public spending and now tax cuts to stimulate the economy through troubled times.
Public sector net debt, tax levels and inflation will remain historically very high for the rest of this Parliament, much higher than what fiscally hawkish economists would advise. Indeed, the OBR illustrated that the tax cuts announced this week will only reduce Rishi Sunak’s tax rises since he became Chancellor by a sixth.
Perhaps, in truth, this approach is more the product of a Prime Minister greedy for public money to support his flagship levelling up and net zero agendas. The bottom line is this: this is a government that, economically, is socially democratic more than anything. High taxing and high spending.
Using a good chunk of what limited funds he had to cut fuel duty is a miscalculation
The extra financial support announced is poorly distributed. It revealed a politician with greater concern for political posturing than good policymaking. His flagship announcements – cutting income tax and fuel duty – were disappointingly predictable and unoriginal.
The fairest way of helping struggling households with rising costs, especially fuel and energy, is through broad subsidies such as Universal Credit or broad taxes such as VAT, National Insurance or income tax.
The Chancellor, in fairness, should be applauded for introducing the most targeted tax cut he could: increasing the starting salary threshold for employees and the self-employed paying National Insurance. To an extent, it will be aligned with the threshold for Income Tax, a policy which Bright Blue has called for since 2014.
The Chancellor seems to be ideologically opposed - allergic even - to welfare, despite Universal Credit being a policy introduced by a Conservative government and performing generally successfully during the height of the Covid-19 pandemic.
By refusing to do anything significant on benefits, beyond an additional £500 million for the clunky Household Support Fund, he is hamstringing himself. What would help vulnerable households best at the moment is increasing the value of benefits, such as Universal Credit or the Warm Homes Discount.
It is embarrassing, frankly, that the Chancellor has recently committed more funding to improve the DWP’s capability to prevent and detect fraud and error (£510 million) than extra support directly to claimants.
Using a good chunk of what limited funds he had to cut fuel duty is a miscalculation. This is not the second time in 20 years it has been cut, as the Chancellor claimed. Fuel duty has consistently been cut in real terms since 2011. It is poorly targeted, especially as fewer than half of the poorest 20 per cent of households actually have a car. People could have received help to afford fuel, among other things, through changes to other broader taxes or subsidies.
Finally, raising National Insurance, via a new Health and Social Care Levy, and then reducing income tax in this Parliament is straightforwardly odd. Since income tax applies to a broader range of income other than work, it means the total tax revenue from earnings is increasing. Whereas the total revenue on other income – for example, pensions and rent – is reducing.
Really, it should be fundamental for a Conservative Chancellor to reward work via the tax system.
Ryan Shorthouse is the founder and chief executive of Bright Blue.
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