Our firefighting chancellor tinkers while inflation burns Posted by David Smith at 09:00 AMCategory: David Smith's other articles My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission. It is a few days since Rishi Sunak’s Spring Statement and, if it registered, you have probably forgotten most of it by now. That, without being unkind, is probably no bad thing, The crisis chancellor, for that is what he has been since being unexpectedly elevated to the job in February 2020, is still firefighting. For those of us with long memories, his latest effort was steeped in nostalgia. Alan Greenspan, the former head of America’s Federal Reserve once successfully nominated for an honorary knighthood by Gordon Brown, but
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Our firefighting chancellor tinkers while inflation burns
My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission.
It is a few days since Rishi Sunak’s Spring Statement and, if it registered, you have probably forgotten most of it by now. That, without being unkind, is probably no bad thing, The crisis chancellor, for that is what he has been since being unexpectedly elevated to the job in February 2020, is still firefighting.
For those of us with long memories, his latest effort was steeped in nostalgia. Alan Greenspan, the former head of America’s Federal Reserve once successfully nominated for an honorary knighthood by Gordon Brown, but whose reputation suffered in the financial crisis, once described low inflation as “that state in which expected changes in the general price level do not effectively alter business and household decisions.”
During a low inflation era, in other words, people and firms do not constantly have one eye on inflation when they are deciding what to do. The same is true of chancellors. It is a very long time since a chancellor has stood up in the House of Commons to confront high inflation and a cost-of-living crisis. It last happened more than 25 years ago, before Bank of England independence.
One of the big reasons for independence, indeed, was because Brown did not want to spend his chancellorship inflation firefighting, freeing himself up make the Treasury an economics ministry, charged with the task of improving the economy’s long-run performance.
Sunak, although his hero as chancellor is Nigel Lawson, has a similar ambition. He genuinely wants to improve the UK economy’s performance. He wants to get British businesses to invest more and spend more on research and development (R & D).
It offends him that the UK does so much worse than competitor countries on investment and R & D and that the best the Office for Budget Responsibility (OBR) can offer for the medium-term is productivity growth of 1.3 per cent a year, two-thirds of its long run average. The OBR, it should be said, has an optimism bias when it comes to its productivity forecasts.
Our supply-side chancellor, who I think is the only holder of the post to possess an MBA, a Master of Business Administration from America’s Stanford University which he studied for courtesy of a Fulbright scholarship, wants to change this. He would love nothing more than to spend his time absorbing the evidence and research and talking to businesses about what they need from him to improve their investment and R & D game.
There will be some of this over the next few months in the run-up to the autumn budget but, while it would be wrong to pre-judge, it is probably not wise to hold your breath for anything genuinely transformational, particularly with a big increase in corporation tax, from 19 to 25 per cent, due in April next year.
How did the chancellor respond to the cost-of-living crisis? One thing they teach you at business school is the importance of focus. Concentrate hard on the matter in hand and try to resolve it.
This was not Sunak’s only stab at dealing with the cost-of-living crisis, He has been responsible for more fiscal “events” outside the normal run of budgets, statements and spending reviews than any of his predecessors. Last month he announced a £9 billion package, consisting of a £150 council tax reduction for bands A to D properties and a scheme to cut £200 off energy bills in the autumn, paid for by users over the following five years.
That may have persuaded him that he had done enough, in which case he made a significant miscalculation. When a Labour MP shouted “is that it?” after he unveiled his latest measures on Wednesday, he echoed my sentiments. A 5p cut in fuel duty and making household investments in green technology VAT free did not cut it.
For those facing big real cuts in benefits and state pensions, who get around by bus rather than by car, and for whom spending thousands on solar panels is about as likely as a trip to the moon, there was nothing. The most striking number in the Office for Budget Responsibility’s latest assessment was that living standards will suffer their biggest annual fall, more than 2 per cent, since records began in 1956-7. This was on the back of an expected peak in inflation of 8.7 per cent later this year, and an average of 7.4 per cent, together with the reality of higher taxes.
It is too late now to do anything about the real cut in benefits and pensions and the reality of that drop in real incomes in coming months, though it is perfectly possible that the chancellor will be back to offer more help, as he surely must, which would fit the pattern of his chancellorship,
There was, it should be said, a very welcome announcement in the spring statement, which was the equalisation of the starting threshold for national insurance (NI) with that of income tax, £12,570 from July. This is a long overdue reform, and the chancellor should be congratulated for doing it, even if that threshold is due to be frozen for the next four years, along with that for income tax.
Unfortunately, the timing of this welcome change was clouded by everything else happening around it. Next month’s NI increase, 1.25 percentage points for employees and a similar hike for employers, was meant to be essential to pay for the NHS post-pandemic catch-up, including in the coming year. But the chancellor has just handed 40 per cent of it back by raising the threshold, which makes a mockery of the hypothecation (a tax rise for a specific purpose) it was meant to be. And, as economists would point out, the 1.25 point rise in NI for employers will ultimately be paid for by employees, in the form of lower wages than would otherwise be the case.
The other big tax oddity was Sunak’s announcement of a 1p cut in the basic rate of income tax in 2024. He would say that, having pre-announced tax increases, as he did last year, it was fine to pre-announce a cut. But that small cut in income tax, if it happens, will come alongside an increase in income tax as a result of the freezing of allowances and thresholds, and the increase in NI, which will be renamed the health and social care levy from April next year. What it does, frankly, is make a messy tax system even messier.
The second most striking number was that, even with the chancellor’s gimmicky promise of a 1p cut in income tax to 19p in the pound in 2024, the tax burden is on course to rise to its highest level since the late 1940s. That is the wrong kind of progress; in the autumn the OBR thought it would only be the highest since the early 1950s.
To be a genuinely low tax chancellor, Sunak would have to abandon some of his planned tax hikes and cut income tax to 15p, not 19p. I am not advocating that, and I do not expect. Higher public spending means a higher tax burden, and it looks as though we are stuck with it.