In his first year as Chancellor, Rishi Sunak was forced by of the Covid pandemic to contend with the worst economic recession for three centuries. He responded with a series of extraordinary interventions, such as the Job Retention Scheme, which prevented the return of mass unemployment. But the challenge that the Chancellor now faces is perhaps still more forbidding. He has set himself the task of reducing government borrowing – the national debt has reached more than 100 per cent of GDP and the UK deficit currently stands at £271bn – without thwarting economic growth.
In truth, there is no need for Mr Sunak to impose emergency austerity measures. Though government borrowing has rarely been higher it has also rarely been cheaper. Owing to ultra-low rates, debt interest payments have plummeted over the past year. The best long-term means of debt reduction is growth and investment. After the Second World War, the national debt stood at 250 per cent of GDP but it was steadily eroded over subsequent decades, falling to 45 per cent by 1973.
At the outset of this crisis, the Chancellor pragmatically understood that “this is not a time for ideology and orthodoxy”. Doing politics well is about getting the balance right and reacting to context. Mr Sunak has since resurrected some of the Cameron administration’s austerity measures, such as a freeze on public-sector pay. But he remains eager to defy easy caricature as a neoliberal or austerian.
During his time at the Treasury, George Osborne cut corporation tax from 28 per cent to 19 per cent. Mr Sunak now proposes to increase it to 25 per cent by the end of this parliament. There is a strong argument for doing so: the UK’s current rate is among the lowest in the G20 (only Switzerland and Singapore have lower rates) and has not led to the promised surge in investment. The economy shrank dramatically during the crisis, and yet digital retailers, outsourcing companies and PPE manufacturers thrived. Their profits are a politically attractive source of revenue: a recent poll by Savanta ComRes found that 55 per cent of voters, including 61 per cent of Conservative supporters, favoured a rise in corporation tax, with only 16 per cent opposed.
Mr Sunak will not have been surprised by the opposition of free-market think tanks and Tory backbenchers. But what he may not have anticipated is that the Labour Party would join them. Keir Starmer and the shadow chancellor Anneliese Dodds have argued against an “immediate” increase in corporation tax on the grounds that it would damage the economy.
The voters, however, could be forgiven for being left bewildered by Labour’s positions: from a radical socialist manifesto in December 2019 to rejecting a Tory corporation tax rise in 2021. In February 2020, during his leadership campaign, Mr Starmer pledged that he would “reverse the Tories’ cuts in corporation tax”, promising that there would be “no stepping back from our core principles”.
It is possible to argue – on technical Keynesian grounds – that no tax rises should be imposed during an economic recovery. But this assertion is unlikely to persuade voters who have struggled as large corporations have thrived. In the US, President Biden has grasped the public mood by calling for a rise in corporation tax from 21 per cent to 28 per cent alongside a $1.9trn (almost 9 per cent of GDP) stimulus programme.
Having fallen behind the Conservatives in the polls following the successful vaccine roll-out, Labour seems increasingly troubled. On 27 February, after Anas Sarwar became the party’s new Scottish leader, the deputy leader Angela Rayner and the shadow foreign secretary Lisa Nandy erroneously tweeted that he was the first ethnic-minority leader of any party (that was the Jewish Benjamin Disraeli). This was careless.
Perhaps no political party is as adept at reinvention as the Tories. Mr Sunak is unlikely to repeat the punitive spending cuts of the past decade. As the Conservatives reposition themselves for a new era of state intervention, the Labour Party seems to have lost confidence in what it is, what it wants and for whom it speaks.
This leader appears in the forthcoming issue of the New Statesman magazine, subscribe here
This article appears in the 03 Mar 2021 issue of the New Statesman, Humanity vs the virus