On 3rd February I was one of four economists who testified to the House of Commons Treasury Committee on the 2021 Budget, exactly one month before Rishi Sunak is due to present it for real. We disagreed on many things, but there was a strong consensus on two points.
First, March is far too soon to be thinking of raising taxes. The economy is of course still hamstrung by the pandemic. No-one really knows what will happen in the coming months, let alone the next few years, or how big the hole in the public finances might be.
As it happens, I was the most optimistic on the panel. The gradual lifting of the lockdown should allow economic activity (GDP) to return to pre-Covid levels as soon as the autumn, unemployment will not rise much further, and taxes may not have to rise at all. Even if I’m wrong (it has been known), a premature increase in taxes could simply prolong the recession.
The second point on which we economists all agreed is that the Chancellor needs to continue to support jobs, businesses, and incomes – at least while there are still substantial restrictions in place. I think this should include extending both the furlough scheme and the enhancements to Universal Credit.
Nonetheless, that should then be it. Many people argue that the Covid crisis has demonstrated the need for the state to take a much bigger role in the economy, in good times as well as bad. In my view, this draws the wrong lessons from the pandemic.
For a start, the track record of ‘big government’ hasn’t been great. There have been some major successes, notably the vaccine rollout (helped by an army of superb volunteers). But many programmes have not gone so well, including ‘Test and Trace’ and the procurement of PPE.
What’s more, the surge in public borrowing has mainly taken the form of transfer payments to private households and businesses, rather than higher spending by the government itself. This additional support was surely the right response to a health emergency where markets were effectively shut down. But it tells us little about the appropriate level of state intervention when life gets back to something more like normal.
Like many other commentators, I’m worried that it will be hard to roll back the state again once the crisis has eased, and that higher levels of both public spending and taxation will become part of the new normal too.
The Chancellor may therefore feel under pressure to be seen to do even more, but he should still resist it. A good example is the call for a new online sales tax to help fill the hole in the public finances and support the High Street. This idea apparently plays well in the polls too. But there’s no obvious public interest in taxing online spending more than spending in physical shops, and no real evidence that the likes of Amazon or Ocado are making excessive profits.
The Chancellor shouldn’t be tempted to raise corporation tax, either. It can’t be stressed often enough that companies are only legal entities and cannot bear the economic burden of tax increases themselves. Instead, all taxes are ultimately paid by real people. This will include shareholders, very few of whom will be as rich as Jeff Bezos. But the burden will also land on employees, in the form of lower wages, and on consumers, as higher prices.
Some argue that UK corporation tax could be increased and still be lower than in many other countries. But any increase would make the UK less competitive than it is now. The fact that many other countries have higher rates of what almost all economists agree is a bad tax is also their problem. As Napoleon might have said, ‘never interrupt your competitors when they are making a mistake’.
My big wish for the Budget is therefore that the Chancellor does the bare minimum. There is already plenty of evidence that, as and when the government can take off the brakes, the economy will rebuild itself without needing much more help. It seems a long time ago now, but remember that GDP was rebounding more quickly than most had expected last summer after the first lockdown was eased and before the second ripple of the virus turned into a wave.
But there is one more way that Rishi Sunak can assist the recovery – and which won’t cost anything at all. This is to change the narrative. Rather than undermining confidence with dire warnings of worse to come and threats of tax increases, the Chancellor’s tone should be upbeat.
This isn’t mere ‘boosterism’. There is already a huge amount of fiscal and monetary stimulus in place, and plenty of pent-up demand to fuel both consumer spending and business investment. Many feared that unemployment would already be twice as a high as it is now. Even the recent data on government borrowing and debt were not as bad as the independent Office for Budget Responsibility (OBR) had been expecting.
The Chancellor should therefore be bold, speak positively – and not do much more.
This piece was first published by Reaction (11th February 2021)