Desperate and delusional

by Sean Rickard

As this Tory government tumbles towards its Brexit denouement it seems determined to put yet another hurdle in the way of competent economic management.   Despite the widespread warnings of reputable experts, the Chancellor is preparing to mimic the Truss-Kwarteng Budget debacle on 6^th March.   Sure, it will be presented in a less blatant form and covered by an obsequious OBR saying he has just sufficient headroom.   Leaving aside the highly uncertain nature of any headroom, the respected Institute of Fiscal Studies (IFS) points out that what is needed is extra spending on public services, not tax cuts.   The government’s current plans already imply cutting investment spending as a share of national income by £20 billion a year in today’s terms by 2028–29 and a return to austerity despite the dire state of public services.   The Tories are both desperate and delusional in believing a tax cutting Budget will miraculously swing public opinion in their favour, as the economic cost will arrive after the election.   But the country has had enough of incompetence and mismanagement, so manifest in the disaster of Brexit now laid bare as a continuing decline in living standards and the UK ‘s standing in the world.

Doubtless, hard-pressed households would like the ‘sugar-rush’ of an increase in take-home pay, or to be more correct an easing of the increasing tax take already programmed in for this year.   They are now however likely to be fooled again by the guile and lies that characterised Brexit.   In his Budget I have no doubt the Chancellor will claim that his package of tax cuts will turn the UK’s economic stagnation into a virtuous cycle of growth, notwithstanding such a claim would be entirely bogus.   He doesn’t have room for large tax cuts without spooking the financial markets and in any event at best tax cuts could only deliver a short-run ‘uptick’ followed by a reversal as the effects are taken-up in higher inflation – the greatest threat to living standards according to the Chancellor – and higher imports.  

Mr Hunt, and the Labour leader are right to argue that only economic growth can secure scope for both tax cuts and higher public spending.   It beggars belief however, that any rational person now gives credence to the idea that tax cutting can secure sustained growth, the more so after fourteen years of failure for this approach.   Needless to say, Tory thinking (ideology would be more correct) on tax cuts is no longer rational – if it ever was.   Generally referred to as ‘trickle down;’ it is based on the notion that even though tax cuts primarily benefit the better-off, the effect of their expenditure drives economic growth, raising living standards for everyone including those of lower earners.  

This theory emerged some 40 years ago and in the ensuing years the evidence has consistently undermined it.   All the best economic minds concur; it is a fantasy to believe that tax cuts will transform economic performance.   As with Brexit the incorrigible hard-right of the Tory party will claim that tax cuts must be accompanied by deregulation.   Yet another delusion for which there is no credible evidence.   I doubt many who experienced the horror of the Grenfell Tower believe less regulation is the way forward.   For the last fourteen years Tory tax cuts have only delivered austerity.   The result is plain for all to see: the wealthy have benefited while public services are near collapse.   It was the rise inequality caused by austerity that gave rise to the resentment which ultimately resulted in Brexit.  

Post Brexit UK democracy is in a pitiful state, laid low by the failed ideology and guileful soundbites from our leaders.   An honest appraisal of the UK’s precarious economic position would start with the recognition that outside the single market – in reality outside the EU – the UK is destined for further economic decline.   This follows because the key to sustained economic growth is investment – both public and private business investment.   Business investment is flat reflecting the fact that countries within the single market offer more opportunities than the UK, and as already noted the government is planning to further reduce public investment despite it being lower than any other country in the G7.   Investment takes time to work and must be coordinated.   Public investment provides the infrastructure including communications to all parts of the country e.g., ultra-fast internet and roads, as well as the expansion of renewable electricity generating capacity to support the mass charging of electric cars.   Underfunding of the health, and associate care services is now very visibly impacting on economic growth.   Businesses are desperately short of labour – despite record migration – and as of last November there were some 2.8 million people not working due to long-term sickness.   But it takes money and time to build hospitals, train doctors and medical workers.  

Recently Mr Hunt has taken to saying countries with low taxes have high growth rates.    Presumably he is talking about the US which is currently growing at an annual rate of more than 3 per cent.   But Biden has greatly increased public spending, most notably with his $369bn Inflation Reduction Act.   Closer to home, the EU is offering a similar funds to share amongst members and France, Germany, and the Netherlands have higher taxation than the UK, but also higher productivity, faster growth, and less inequality.

In short, Mr Starmer please take note, if the UK is to enjoy a return the sustained growth it enjoyed under the last Labour government it must eschew tax cuts in favour of investment and set about rejoining the EU.   The Tories will leave the incoming Labour government in the invidious position of either reversing Mr Hunt’s tax cuts or accepting a new bout of austerity.   Warmer relations with the EU will not be sufficient; the prospect of rejoining would positively impact business investment.   Outside the EU as a low tax country the UK will be hobbled by lacklustre growth, declining public services and growing inequality.