The Conservatives have a plan. It is not original, or subtle but it conforms to a playbook they trust. The ambition, shared by both prime minister and chancellor, is to rein in spending and borrowing now so they can cut income tax before the election.
There is no point in bemoaning governments trying to get re-elected. Nor is it dishonest for a party which believes in lower taxes and public spending to want to reverse a situation where by 2025/6 the UK’s tax burden will reach a 70-year high. But at this moment, it is the wrong lodestar for the nation.
It also places undue weight on pre-election giveaways. The Conservatives traditionally enjoy a head start over Labour on the issue of economic competence. The notion that they are more careful with the UK’s money is so ingrained that it often holds when it is not deserved. Voters instinctively believe that however high taxes are, they will be lower under the Tories.
Party strategists hope a tax cut will underscore a narrative that the government managed the economy so well through the pandemic that it can now start returning some of their money. The opposition will be challenged to agree to the cut or face the “Labour will raise your taxes” campaign, which the Tories are going to run in any case.
The promise of tax cuts is part of the chancellor Rishi Sunak’s armoury in trying to maintain spending discipline. It is also important for Sunak, who wants to remind his party that he is instinctively a Thatcherite tax-cutter — potential rivals for the succession, like Liz Truss, the foreign secretary, have been burnishing their low-tax credentials.
So the politics seem clear. Ahead of next week’s Budget, the message is pain today for electoral jam tomorrow. But there are two problems with this. First, what voters notice is their disposable income. If everything else is more expensive, with other taxes and energy bills rising to meet net zero commitments, they are unlikely to swoon over a pre-election tax cut.
Second, and more important, is that Britain is enduring a period of turbulence. Covid delivered a shock to the system, the effects of which are still playing out. Brexit requires a new economic strategy and the climate agenda promises huge dislocations. Furthermore, as the pandemic illustrated, a decade of austerity stretched public services far too thin.
Levelling-up the regions demands substantial investment in skills as well as infrastructure. Higher research and development spending is essential to maintain the UK’s relative advantages in science and innovation.
The chancellor has taken a number of steps to bring more private money into green investment. But even if he hits the goal of £90bn in private investment over the decade, that is against Treasury projections requiring spending exceeding £50bn a year before 2030. Ministers will face constant demands from industry seeking help with costs of transition, not all of which can be dismissed as special pleading. The current spike in energy prices is a warning of the challenges.
Conservatives argue, rightly, that not everything is about more money. The NHS needs efficiency reforms and more focus on preventive medicine, but those also require upfront investment. And few think the recent increase in National Insurance solves the NHS’s funding issues. The Institute for Fiscal Studies argues the new levy will have to rise from 1.25 to 3.15 per cent by 2030 to meet future health and care needs.
Sunak is not wrong to worry about inflation and borrowing. His projected tax rises bring non-investment borrowing into balance but barely reduce the debt. The IFS thinks inflation and a rise in rates on government bonds will push debt interest £15bn higher than anticipated in the March budget.
But the country is in a moment of transition and the population suffering a period of insecurity. This will mean a bigger role for government investment and day-to-day-spending. This year’s borrowing figures are better than forecast. But if Sunak is unwilling to extend his three-year timetable for returning the current account to balance, he will have to get lucky or spend too little to find room to lower taxes.
Even if the UK does hit that 70-year high of 35.5 per cent, it will still be well below most EU nations. Both Germany and the Netherlands have significantly higher tax burdens, as do France and Belgium. Meanwhile UK investment, both private and public, is lower as a percentage of GDP than in any other G7 nation.
Given the opposition’s weakness, planning for a pre-election giveaway should be a lower priority for this government than long-term thinking. The voters are more likely to reward an administration that is meeting the expectations it set: decent public services, transition to net zero, tackling the aftermath of Covid and making a reality of levelling up. Labour may be languishing now but historically it wins when the country believes it needs a government focused on investing in the future.
Boris Johnson understood this point at the last election. While he could not have predicted the pandemic, which threw off all calculations, this is not the moment to switch track.
The time will come when Tories can return to their tax-cutting roots but it is the wrong fixation now. In the face of today’s challenges, prudent management of the economy may mean something other than an election bung of limited tactical value.