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4 November 2021

The best way to boost economic growth is to reverse hard Brexit

Brexit is forecast to do twice as much permanent damage to the economy as Covid. But this self-inflicted wound can be healed.

By David Gauke

It is slowly dawning on the Conservative Party that it is becoming the party of taxation, and it really does not like it.

I wrote last week that when the Chancellor found he had more money than previously forecast by the Office for Budget Responsibility (OBR), the only real question for his Budget was how that was going to be distributed between higher spending and lower borrowing. Lower taxes – even after £40bn worth of tax rises had been announced earlier this year – was never in the reckoning.

The ConservativeHome ratings of cabinet ministers suggest that the Budget and spending review has seen Rishi Sunak’s popularity take a hit: he has fallen from his customary position of second place to 12th. Among his critics appears to be the Chancellor himself, given that he inserted a section into his Budget speech that espoused the virtues of a limited state after he had spent the previous 40 minutes expanding it. If the Chancellor is not convinced by his economic strategy, it is not altogether surprising if party members start to have doubts about it too.

The unfortunate reality for those demanding lower taxes is that the current situation is in part inevitable and in part self-inflicted. The inevitability is the consequence of an ageing population. The demands on our health and social care systems will only increase and, unless we shift the burden from taxpayers to users of these services (and with social care, we are going in the opposite direction), tax will have to go up.

It is also the case that we have come through a long period of significant restraint in public spending that it is no longer politically possible to maintain. Some areas of public spending evidently need more – the justice system springs immediately to mind – even before we address the challenges created by the pandemic.

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This is all in the context of a government elected with the support of voters who have previously voted Labour, and whose instincts on economic issues lean more to the left than the right. Small-state conservatism is unlikely to appeal to the Red Wall.

The demands for higher spending could be much more easily dealt with without resorting to tax increases if the economy was growing strongly. But, discounting the Covid bounceback, this is not likely with growth forecasts of 1.3 per cent in 2024 and 1.6 per cent in 2025.

The OBR’s assessment of the permanent economic scarring caused by Covid might be reduced below the current estimate of 2 per cent, but there is no reason to believe that the damage done by Brexit will be anything less than the estimated 4 per cent (see graph above) – the emerging trade data is consistent with the OBR’s previous analysis. If anything, these numbers will prove an underestimate if the UK provokes a trade war by triggering Article 16 of the Northern Ireland protocol (as many in the EU expect once Cop26 has concluded).

Government ministers dismiss the 4 per cent number as old news, almost a matter of bad taste in even raising it, but it is an extraordinary sum. In terms of tax revenue, it constitutes approximately £30bn per annum, which – as it happens – is the amount George Osborne warned would need to be raised in additional tax if we voted for Brexit. This is the self-inflicted element.

The combination of these factors means that high taxes are here to stay and, given the demographic pressures, the tax burden is likely to increase over time.

There are three questions that all political parties should be asking themselves. How should we raise this revenue in a way that is fair, efficient and sustainable? How should we deliver high-quality public services as efficiently as possible? And how do we increase economic growth?

These are, of course, perennial questions, and hard ones at that. There is little evidence that they are at the forefront of the government’s mind. Tax increases have been driven by political expediency (higher corporation tax rates is an economically damaging way to raise revenue), as is spending policy. Crowd-pleasing input targets (“20,000 more police officers!”) and pots of cash for marginal seats are unlikely to deliver good value for money.

As for encouraging growth, this could be an important contested field. Labour’s critique that we have high taxes because we have low growth is a promising one for them if pursued vigorously. The challenge for all parties will be to answer the question: what will you do to deliver higher growth?

This is not an easy question to answer credibly. High on the government’s list of policies is free ports, which has been dismissed by the OBR as an irrelevance.

Giles Wilkes has recently made a convincing case that increasing the growth rate is very difficult for a government to do but that it is relatively easy to reduce it. This is one reason why the 4 per cent of GDP Brexit hit is so significant – it would require a very long list of politically brave and contentious measures to even begin to compensate for it.

Here is a suggestion. If opposition parties want a growth strategy, their most credible approach is to point to that 4 per cent number, identify the cause – a hard Brexit – and promise to reverse as much of it as they can. If we really want lower taxes, there is no alternative.

[See also: Britannia Chained: why the legacy of Brexit threatens Boris Johnson’s Global Britain]

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