Jonathan McHugh illustration of Camilla Cavendish column ‘The Tories cannot avoid the tax question forever’
© Jonathan McHugh 2020

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This week’s UK spending review was remarkable not only for what the chancellor announced — that the economy has taken the biggest hit for three centuries — but also for what he left out. Rishi Sunak studiously avoided mentioning Brexit, for which there is no vaccine. He left us guessing as to whether the government has a meaningful strategy for growth. And he said nothing about how the record borrowing will eventually be paid for.

This was all in keeping with the current spirit in Westminster, where MPs seem to be in a state of suspended animation. Having pronounced the country to be in the grip of an “economic emergency” that “has only just begun”, Mr Sunak was assailed by demands from MPs for more spending and questions on climate change and gender pay gaps, which seemed at best peripheral.

I suppose a political class that has chosen to ignore the plight of the services industry for the four years since the Brexit vote was unlikely to focus much on supporting enterprise. Instead, the week has been dominated by outrage over a reduction in a previously generous foreign aid budget, and a freeze on some public sector wages.

Perhaps it is simply too difficult to grasp the implications of a staggering 11.3 per cent contraction in gross domestic product. All countries have been hit by the pandemic, and we don’t yet know the shape of the recovery. But the UK does seem to have shrunk more than any other European economy except Spain.

You might think a commensurate response would involve turbocharging government with the best talent from around the world, or joining France in demanding taxes from tech companies, or rebalancing equity from the old towards the young. But the government is sticking largely to its pre-Covid-19 manifesto, as if nothing has changed.

This is made easier by an apparent political consensus is that money is free. Many Conservatives hope to treat pandemic spending like wartime debt, paid off over decades at ultra-low rates. But the Treasury fears the level of borrowing is “clearly unsustainable”, in Mr Sunak’s words, with the country vulnerable to interest rate shocks and any dip in the confidence of financial markets.

Hawkish Tories would usually feel alarmed by the Institute for Fiscal Studies forecast of a £40bn hole in the public finances by 2025 and want action to raise taxes or cut spending once the immediate crisis has passed.

But many of those hawks are Brexiters, for whom prolonged stimulus has become politically expedient, as well as economically necessary. They know that the uncertainty of leaving the EU has compounded the economic hit from Covid-19. Even if ministers manage to negotiate their bare-bones deal with the EU, the Office for Budget Responsibility predicts it could reduce the UK’s economic output by 4 per cent in the long run.

If Brexit brings a world of red tape and customs checks and job losses, Boris Johnson hopes to inoculate himself against the wrath of the British public by blaming the economy’s woes on the pandemic. The prime minister likes to spend money, and he will be keen to resist anything that looks like austerity.

Chancellors tend to raise taxes in the first half of a parliament, not the second when an election is looming, but most Tory MPs oppose tax rises that might choke off recovery. Some even want tax cuts, following the logic of the Laffer curve, which states that tax revenues will fall if tax rates increase above a certain point. Others argue that we have no idea where the country is on that curve and that tax cuts would be foolish in a smaller economy with lower tax revenues. Having spent years mocking Labour for profligacy, many are desperate to salvage the Conservative party’s reputation for economic competence.

This divide in the party will become more obvious in the run-up to the spring Budget. While Mr Johnson is sticking by his pledge not to raise income tax, national insurance or value added tax, Mr Sunak has refused to rule out such moves. Dan Rosenfield, the new chief of staff and a former Treasury official, will have his work cut out to bridge this gap between the prime minister and his chancellor.

The irony is that Mr Johnson is instinctively against big government and higher taxes, but he may end up presiding over both. Just as the state expanded after each world war, Brexit and Covid-19 have inflated the bureaucracy. Mr Johnson hopes to grow his way out of the problem, by “turbocharging” enterprise and competitiveness. The vaccine from Oxford university and AstraZeneca is a reminder that the UK has a world-class research base. But, as yet, there is no convincing plan for a private-sector-led recovery. 

Tory pledges to “level up” the north, and invest in science and the NHS, feel more relevant now than ever. But other parts of the 2019 manifesto were written for a different era. It makes neither fiscal nor ethical sense to maintain an expensive triple-lock on pensions, when a whole generation of younger people has been scarred by the pandemic. Raising the national living wage may lead to more job losses from hospitality. And while a national infrastructure bank is a good idea, not all of the long-term transport projects it would fund will be the best way to deliver jobs, or climate change commitments.

However you slice it, the UK is permanently poorer. Growth may rebound next year as a result of a vaccine, but debt will persist. The chancellor has eloquently set out the emergency facing the British economy: now the government needs to rise to the challenge.

The writer, a former head of the Downing Street policy unit, is a Harvard senior fellow

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