Boris Johnson, the prime minister who will be remembered for abject failures of judgement and behaviour, and for “getting Brexit done” (but not for unleashing Britain’s potential), is slowly packing up at Number 10 while the six (at time of writing) shortlisted candidates vying to succeed him as leader of the Conservative party set out their stalls.
Tax sits at the heart of this battle for the leadership. The Tory party is the natural home of low tax and small government and the UK’s current high levels of tax, driven up by the pandemic as it pushed the government into high spending mode to support businesses and individuals, are unpalatable to some. There are strong objections in particular to the planned corporation tax rise to 25 per cent next year from the current 19 per cent.
It cannot be denied that high tax has been identified as a threat to economic growth (the OECD has pointed to the UK’s high tax burden as one reason for its prediction that the UK will suffer the lowest rate of growth in the G7 in 2023) or that businesses have been through a series of shocks in recent years – Brexit, pandemic lockdowns, soaring inflation, rising interest rates and an energy crisis – and could do with a helping hand.
Tax cuts would be popular with the electorate too following the introduction of higher rates of National Insurance (a burden also being borne by employers) and the freezing of tax thresholds at a time when households are facing soaring annual energy bills.
But tax cuts will cost the government billions in revenue each year (the corporation tax rise should yield an additional £16bn a year), and that’s not particularly helpful when public sector workers are fighting for pay rises as they watch their cost of living ballooning. A reduction in tax on business profits could stimulate growth and would suit battered businesses very well, but, as Hermione Taylor explains on page 19, a race to the bottom on tax isn’t always productive.
In addition, cutting tax revenue would come at a cost to financial stability. The view of the Office for Budget Responsibility (OBR), the independent fiscal watchdog tasked with analysing UK public finances, is that UK national debt will rise from 90 per cent of gross domestic product (GDP) now to twice the level of GDP in the mid 2060s – and that’s assuming no further crises such as war or pandemics, which would require even more public spending, and energy prices falling back to more affordable levels.
Factor in additional shocks along the way, and the national debt could, it warns, reach more than three times GDP. The only way to avoid such a loss of control over the public finances and hence allow for future crises and a manageable cost of servicing that debt, is for taxes to keep rising or spending to be cut drastically. The OBR reckons that an additional £185bn in tax revenue is needed over the next 50 years to achieve 75 per cent debt to GDP. And it warns that increases in defence spending in the face of rising geopolitical tensions and the loss of fuel duty in a decarbonising economy could deliver further significant blows to revenues.
What might serve businesses much better than political gimmicks and games is rebuilding a good relationship with the EU instead of inflaming it further, and for political leaders to develop convincing and consistent plans aimed at getting the economy through challenging times and securing the long-term prosperity of the nation. Businesses prize stability but in recent years, in addition to the rapidly changing macro landscape, volatile markets, the risk of recession – notwithstanding the 0.5 per cent increase in output in May – they have faced an in flux political backdrop which is reflected in the high number of prime ministers we’ve been getting through since the Brexit referendum. We need a government focused on keeping the economy on its feet and growing, and big picture issues such as productivity and long-term energy security, not internal party squabbles. After Boris, the worst of all outcomes would be more inconsistent policies and the focus stuck on short-term gains.
