ALEX BRUMMER: Rescind the post-Covid Tory tax hikes

The Tories are in a terrible muddle on taxation. 

Scared witless by the scale of the fiscal mountain to be climbed after Covid-19, Chancellor Rishi Sunak miscalculated by freezing personal allowances until 2025-6 along with the thresholds for capital gains tax.

The initial benefit to the Exchequer was estimated at £8billion in year one.

Analysis by the Institute for Fiscal Studies shows that, as a consequence of surging prices, extra revenue will amount to £20.5billion a year. 

In addition, Sunak has baked in the cake a corporation tax rise from 19 per cent to a whopping 25 per cent next year.

And to help pay for the NHS and social care, every employee and employer is paying a 1.25 percentage points surcharge in national insurance contributions.

Together, the measures (before inclusion of the windfall tax on oil production) mean that the Government has the dubious honour of raising a higher percentage of taxes from the British people and commerce of any UK government since the 1940s.

Getting on the front foot and restoring order to public finances might have seemed the right thing to do at the time. 

It demonstrated that the UK, cut free from the EU, was capable of imposing the fiscal discipline which impresses financial markets.

Where the Government miscalculated was in its belief post-pandemic price increases were transitory and inflation would cool down. Precisely the opposite has happened.

The cost of living crisis gathered momentum, fuelled by the Ukraine war. Some firms and industries have seen the new great inflation as an opportunity to restore or augment profit margins.

A result is greedflation: the £8-pint-of-beer, £2-a-litre petrol and handsome profit margins for Europe’s most successful fashion retailer Inditex, owner of Zara.

What the Chancellor failed to figure out was that a tightening fiscal stance together with rising interest rates to deal with inflation would lead to a fierce squeeze.

Tax rises accompanied by steep jumps in UK interest rates will consign Britain to the dunce’s chair among the G20 richest nations, according to the Organisation for Economic Co-operation and Development’s latest forecasts.

Laurence Boone, its chief economist, cites a toxic combination of high inflation, rising interest rates and tax increases.

How the Government managed to lose sight of the Tory value of low tax is anyone’s guess. But what has been demonstrated, as the economy emerged from Covid, is that revenues from VAT, taxes on income and business have climbed with growth and the recovery of employment.

If the Government wants to fight the next election with a healthy economy it needs to act urgently to dam the tax torrent.

The Chancellor began to do so in the Spring Statement by moving up the thresholds for the lower paid in an effort to offset energy bills. He also dangled a penny off income tax in April 2024.

As welcome as these may prove, they hardly amount to a decisive policy shift. If he were truly brave, Sunak would meet the cost of living threat by unfreezing personal allowances right up the income scale. He would also cancel the corporation tax rise.

Low headline company tax rates have over recent decades made the UK a favoured location for overseas investment.

It leads to willingness to pay more – and less avoidance.

I recently happened upon Gordon Brown’s Budget of 1998 when looking for how much might be raised by an energy levy. What struck me was how Labour saw enterprise as the key to prosperity. 

Among proposals was a sharp reduction in corporation tax, with the rate for small firms cut to 20 per cent.

Long-term capital gains tax (currently 18 per cent) was to cut to 10 per cent and he strengthened the free market enterprise investment scheme. 

Arguably, all this was possible because Brown inherited a booming economy and sound finances from Tory predecessor Ken Clarke.

If Sunak has a tax-cutting zeal, and one suspects that he has from his work on ‘freeports,’ he needs to grasp the moment, change direction and make higher output, entrepreneurship and prosperity the goal.

Lower taxes might encourage the 460,000 economically inactive citizens – who have left the workforce since Covid – to return, easing strains in the labour market.

Sensible tax policies could just be the magic pill for a Tory revival.