Give up hope of a low-tax Britain Business

Part of the thinking behind Sunak’s budget cut is that with the economy restored to pre-pandemic health and indeed in danger of overheating, demand could be in for a bit of a deflate. It’s a bit reminiscent of the kind of stop/go tax policies we had in the 50s, 60s and 70s and, to be frank, it’s not good economics. If there is a tightening to be done, it is better to rely on monetary policy.

Whatever the good and the bad of pressuring demand through fiscal means, Putin’s war, when combined with the cost of living crisis, changes the calculus. The tables are reversed; contractionary forces appear to have overtaken inflationary forces as the greatest threat.

As it stands, public finances are turning out to be in rather better shape than the Office for Budget Responsibility predicted in the last forecast update in October, apparently giving the Chancellor the fiscal room to maneuver for at least less delay the planned increase in national insurance.

For now, he seems determined to resist. If not now, he asks, then when? Delaying only delays the bad day when a way must be found to pay for the inexorably rising health and social care costs. This is a point of view with which I have some sympathy. If there is money to spend, it would be best spent on those who are least able to cope with the current cost of living pressure.

In addition, the list of seemingly unavoidable claims on public funds continues to grow, including debt servicing costs, now under intense pressure from rising inflation and rising interest rates, and military spending. The latter will have to fall from 2.3% of current GDP to around 3% just to keep up in nominal terms with the increases promised by Germany’s Olaf Scholz and maintain Britain’s position as the biggest defense spender in Europe. .

The “peace dividend” once proclaimed by George HW Bush and Margaret Thatcher – representing the defense spending savings brought about by the fall of the Soviet Union – has just gone up in smoke. This dividend was collected and applied massively to the expansion of health and social protection expenditure; it is difficult, if not impossible, to go back on such commitments once they have been made.

Many conservatives still look longingly at the Thatcherite ideal of a low-tax economy and a small state, and promise that it can still be achieved. Keep dreaming, because any realistic projection of the future suggests precisely the opposite. Putin’s war makes the return of Big Government Britain almost inevitable.