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In the UK, Conservative party campaign ads often warn of “tax bombshells†about to be dropped by a profligate Labour party. Yet allies of Chancellor Rishi Sunak recently briefed the media about a Tory “tax bombshell†to pay for the billions splurged by the government during the Covid-19 crisis. An explosion duly followed in the ranks of his party.
Sunak backtracked fast. There would be no “horror show†of taxes in November’s budget, he assured fellow MPs. For the chancellor, the favorued child of a luckless government, this was a serious reality check.
He is one of the few Cabinet ministers to emerge from the crisis with an enhanced reputation. The billions he has spent on a generous furlough program for workers and an ingenious scheme to bribe fearful consumers into dining out have been widely popular. A total of 192 billion pounds ($245 billion) in fiscal support buys you a lot of friends, it turns out.
But in politics, memories are short. Higher taxes might well choke off a nascent economic recovery. A former leadership candidate, David Davis, who often argues an independent line, put it to me bluntly: “It would be stark, raving mad.†Instead of hiking taxes, Sunak should focus on restraining government spending to areas that won’t damage growth.
Take the job retention program, for example. Some economists predict that Britain is heading for an
unemployment crisis “of Biblical proportions†if the furlough scheme expires on schedule at the end of October. Nobel-winning economist Chris Pissarides of the London School of Economics warned that ending the scheme would be “one of the biggest policy mistakes in modern British history.†But the current regime is vulnerable to fraud. Sunak would be wise to replace it with a cheaper, targeted program.
It seems like only yesterday that Conservative MPs were jeering at the last left-wing Labour opposition leader, Jeremy Corbyn, for believing in a “magic money tree†of state spending. Nowadays the Tories appear to have abandoned fiscal restraint altogether.
Invoking Churchillian rhetoric, they see the pandemic as a wartime-like emergency that demands exceptional measures and stratospheric government borrowing. Their instincts in this case are largely correct.
But they also support large spending increases on health, measures to “level up†conditions in “left-
behind Britain†and headline-hunting infrastructure projects. The only outlay of which the dominant right seems to disapprove is the commitment to 0.7% of GDP for foreign aid.
Someone has to urge restraint. That someone is traditionally the chancellor.
Sunak is not “mad.†He is rightly concerned that his colleagues have given up all fiscal discipline.
—Bloomberg