By Sascha O'Sullivan
The calls for tax cuts are ceaseless, even in the face of evidence they won’t help us to growth, Rishi Sunak needs to stop arguing over whether or not we can afford them, and start stripping back taxation as a whole, writes Will Cooling
I am starting to suspect that for all the sound and fury, 2022 was not as momentous a year in politics as we suspected. In fact, this year has begun much like the last, with Rishi Sunak resisting calls from his own party to be fiscally irresponsible.
Never mind the ferocious backlash from global lending markets to Trussonomics or the need to spend more on providing weapons to Ukraine and subsiding everyone’s fuel bills, the Tory Party wants its tax cuts and it wants them now. Neither the signs our public services are dangerously underfunded, even at current spending levels, nor the rising interest rates are enough to discourage the unending calls.
The latest cudgel to be wielded against Rishi Sunak is the International Monetary Fund’s prediction that Britain will be the only leading economy to enter a recession this year, with even a Russia beset by sanctions predicted to have some economic growth. This has been seized as evidence that Liz Truss and Kwasi Kwarteng were right all along, and now is the time to cut taxes and dash for growth. Of course, such claims ignore the IMF’s brutal denunciations of the mini-budget.
Tax cuts would do little to address the issues highlighted by the IMF. They would do nothing to lessen the impact of high inflation and could easily make the situation worse. Indeed, it was attempting to fund tax cuts with greater government borrowing that accelerated the increase in interest rates. The ensuing squeeze on household budgets was merely collateral damage. And it’s hard to see which tax cuts could address the reluctance of older people to return to work after the pandemic.
But if Sunak wishes to remain Prime Minister, he cannot repeat the mistake that initially cost him the leadership last year. A sullen, half-hearted refusal to cut tax only antagonises his internal critics and offers nothing for his supporters to rally round. However, his freedom to manoeuvre is limited both by the divides in his own party, as well as how his own personal desire to deliver tax cuts runs up against a genuine need to better fund key public services.
There is no easy way out of this for the Prime Minister. If I was Rishi Sunak (which, thankfully, I’m not) I would try honesty. He should admit his party does not have an answer on tax and spend and say this is because there are no easy answers to the problems this country faces.
He should be open that something has gone wrong with taxation in this country, as governments have tried to deliver more and more public spending without refusing to increase taxes such as income tax that people most notice. This has led to them pursuing gimmicks and shortcuts which have made the taxation system needlessly complicated and introduced perverse incentives into the system. He should boldly say that the current taxation system is broken, delivering neither enough revenue to fund public services, nor incentivising individuals or companies to be as productive as possible.
These admissions should then be followed by an offer to the Labour Party. An offer to put aside arguments about the level of taxation and spending for the time being, so that the two parties could work together to restore some semblance of clarity to the overall system. He could offer that both parties would appoint people to an expert committee to identify how best to streamline our taxation system.
If this sounds overly idealistic, it has been done before, with Ronald Reagan’s famed 1986 Tax Reform Act in America. Such a review would seek to remove the distortions that add needless complexity, discourage growth, and penalise hard work by broadening the tax base whilst reducing headline rates. The two parties could then work to implement the proposals before resuming hostilities about the precise levels of taxation within the new framework.
Such an offer would give Rishi Sunak something to say on taxation that means more than disappointingly explaining to his party or the country that there is no jam today. It might provide some breathing room to allow for slightly higher borrowing in the short-term to address the immediate crisis in the public sector. And it would restore some of the lustre to the reputation for being a different type of Tory that he acquired during the pandemic, which has dissipated as he’s led a narrowly partisan government.
It would also encourage the press and the public to look more closely into what Keir Starmer and Rachel Reeves would do on taxation to meet their commitment to increase spending on public services without borrowing more to fund their day-to-day delivery. And if he could somehow secure their support for a thorough reform of the British taxation system, it would leave him with an important legacy even if he ultimately goes down to defeat at the next election.
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