finance

Tax rises and austerity are not the way to shore up post-pandemic growth


What kind of austerity would you prefer?

There is the reheated version from 2010 that puts most of the emphasis on cuts in public spending. Tax rises are another option. In recent weeks Downing Street sources have floated the idea of taxes on wealth, clobbering the better off, alongside taxes on consumption, hitting everyone in the pocket.

A steep rise in unemployment could take much of the strain. This would dump most of the problem on to those unlucky enough to find themselves out of work. Wage freezes could be a fourth option, mitigating the dash to make people redundant by lowering employers’ staff costs across the board.

What looks increasingly likely is that Britain will get a mix of all of these unless there is a change of direction. Or, more importantly, a coherent message from the top about the direction of travel.

Boris Johnson’s insistence that public services be preserved has fallen on deaf ears at the Treasury. Such are the cuts to local government that borough and county council managers are preparing “legal minimum” services. There was supposed to be a bailout fund, but that looks like it will never materialise.

Meanwhile, Whitehall departments are sizing up cuts to fit with demands for a cash squeeze as part of Rishi Sunak’s comprehensive spending review.

Health secretary Matt Hancock is supposed to be immune from this cost-cutting process, and it’s true he has secured the resources for hospitals to tackle Covid-19 flare-ups. What he cannot say is whether he has the people and funds to make up for six months or more of cancelled outpatient appointments.

The prospect of tax rises is the cause of yet more confusion. It is apparent to any newspaper reader that the autumn budget will inevitably include them.

There are plenty of thinktanks and economists huddled in the political middle ground urging Sunak to be cautious with public funds and not only limit spending but also start raising taxes at the earliest opportunity. The Institute for Fiscal Studies is in the vanguard of thinktanks detailing the huge shortfalls in spending this year and next as the government copes with the pandemic.

Chancellor Rishi Sunak and Boris Johnson on their way to attend a cabinet meeting.
Chancellor Rishi Sunak and Boris Johnson on their way to attend a cabinet meeting. Photograph: Toby Melville/AFP/Getty Images

And yet we know tax rises are not inevitable, especially when Tory backbenchers, and even ministers, get their teeth into the subject. The broad swath of middle-England Tories and those representing former “red wall” seats in the north-west and Yorkshire will balk at rises in tax rates or changes to thresholds, much as they have done at every opportunity in the past 10 years.

The Treasury’s furlough scheme was designed to persuade employers to delay making judgments about staffing levels until the effects of the pandemic had waned. This has worked in the main, but with more than two million workers still on furlough at the last count, the scheme, due to terminate in October, looks like it will end too early for many firms. Unemployment is therefore set to rise steeply.

The Bank of England chief economist, Andy Haldane, said in an interview last week that employers and unions should use wage freezes as a way to limit redundancies. Wage freezes and cuts in hours were widely deployed after the last crisis and did reduce the impact on the labour market. As Haldane knows, though, they are not without their costs – the main one being a decade of lost growth in living standards.

Anecdotal evidence appears to show that wage freezes have already been adopted. It is not known whether this has limited the appetite for redundancies.

It is possible the UK will get both, and especially in the worst-hit industries of aerospace, hospitality, leisure and the creative arts, where the ending of the furlough scheme effectively dashes any hopes that many had of surviving until the economy had fully reopened and the pandemic in retreat.

A coherent message from government would be one that learned the lessons of the 2008 crash and George Osborne’s failed austerity project in 2010.

It would rule out tax rises, leaving talk of reforms to the balance of wealth and income taxes to longer-term reviews. It would mean maintaining public spending and boosting public investment. The furlough scheme would be extended until the spring and universal credit increased to a level where it could take over as a safety net for those who eventually lose their jobs.

Britain’s debts would rise as a result. That is for sure. It would be a short-term rise, though, paid off not through austerity but growth.

With thought and effort, such a return to growth, even with the pandemic lingering, could be directed at low-carbon industries to confront the climate emergency. Of course, it won’t be possible while the Tory party continues to tear itself apart and the cabinet points in different directions.



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