The UK economy, as we have been pointing out for some time, is in a bad way. Britain is the only major country forecast by the IMF to suffer a recession this year and average real wages are expected to remain below their 2008 level until 2027. In the supposedly dismal 1970s – the decade used as a reference point for decline – average annual GDP growth was 2.6 per cent. Britain will be lucky to achieve half of that in the 2020s. The quip that the UK is becoming Italy without the sunshine is increasingly harsh on Italy.
For these economic maladies, Conservative MPs have a purported cure: tax cuts. Backbenchers, most notably the party’s Trussite continuity wing, are clamouring for Jeremy Hunt to take action in the Budget on 15 March. In response, the Chancellor and Rishi Sunak plead for more time. Not until inflation and government borrowing have been reduced, they insist, can they cut taxes. Like Maimonides, Sunak’s message is that the messiah will come “but he may tarry”.
Though the tax take is approaching its highest level since the 1940s, the Prime Minister is not bluffing when he affirms his low-tax beliefs. It is the logical corollary of his commitment to a small state. In 2015, as a new MP, Sunak argued that “in normal times public spending should not exceed 37 per cent of GDP”. Though spending has swelled since then, as Britain has been buffeted by Covid-19 and much else, Sunak’s original ambition endures. On tax, the difference between the Prime Minister and his recalcitrant MPs is less one of principle than of timing.
But both sides are fixating on a false god. The UK’s mediocre economic performance owes little to its tax regime. Indeed, by Western standards Britain remains a relatively low-tax country. The tax take is forecast to reach 37.1 per cent of GDP by 2027-28, putting the UK comfortably below countries that are wealthier and more equal than it: France (51.7 per cent), Sweden (49.9 per cent), Germany (46.3 per cent) and Canada (40.6 per cent).
Rather than an excess of taxation, Britain’s economic woes reflect a dearth of investment. Spending on research and development remains among the lowest in the G7: the UK has just 101 installed robots per 10,000 employees, putting it behind countries including the Czech Republic and Slovenia. Business investment remains below its pre-Brexit 2016 level. The supposed “productivity puzzle” is not a puzzle when a country spends so little on training and technology.
As for taxation, the grim truth that Conservative MPs must confront is that the material factors pushing taxes upwards are stronger than those pushing them downwards. An ageing population, stagnant living standards, the climate crisis and heightened voter expectations all necessitate higher government spending – and, ultimately, higher taxes.
Do Britons feel overtaxed? A graduate earning £25,000 and paying an effective marginal rate of 41 per cent may have a case, as do the lowest-paid, but the polling evidence suggests that taxation is not a defining grievance. Britons feel underpaid and under-served (by the state and the market) but few will go to the barricades over taxes – a mere 6 per cent want lower taxes and lower spending, the cure prescribed by Tory libertarians.
Yet Conservatives persist in viewing tax cuts as an elixir for their political woes and Britain’s economic woes. As and when they eventually do cut taxes, they will merely discover that they have been looking in the wrong place.
[See also: The Daily Mail’s tax statistics are an own goal]