THE ARGUMENT for lower taxes is a strong one. Government should only take from us the money it requires to do the things Governments need to do, or to provide the services Governments can best provide. Otherwise, we should all be allowed to decide how to spend our own money. Reducing tax at times when household and business budgets are stretched obviously has benefits.
There was therefore much to welcome in the Chancellor’s economic statement. Reducing the basic rate of income tax in April next year means bringing forward a change already planned and will benefit a large number of people. Making permanent an increase in the Annual Investment Allowance for businesses will encourage the sort of investment which will contribute to the increased growth in the economy the Government is right to prioritise. The creation of Enterprise Zones where lower business rates or capital investment taxes can stimulate development could help us locally as the Coventry Airport site, which may host a battery Gigafactory, could be a candidate, strengthening Coventry and Warwickshire as a centre of the automotive industry. VAT-free shopping for overseas visitors will help our local tourism businesses as that industry recovers from the effects of COVID-19.
Being in favour of low taxes as a matter of principle need not however mean that you are in favour of reducing any and all taxes at any and all times, and I am not. Helpful though reductions in tax will be over the coming months, along with the short-term measures the Government has taken to reduce energy bills by direct support and limiting price rises which I welcome (although the support offered to those not on mains gas needs clarification or improvement), every judgment the Chancellor has to make is a balance. Lower taxes mean less money in the Treasury, at least in the
shorter term, and, unless spending is to be reduced, that deficit has to be made up by other means.
The Government is proposing to lower many taxes at once, and intends to pay for it with additional borrowing. It was right to borrow more to deal with unexpected and extreme events like the pandemic and the energy price spike, but because we have had to do so for both of these in a relatively short time period, our national borrowing is at a high level. Choosing to raise it again to fund tax cuts at this point has risks. In the longer term, it increases the burden on later generations to pay the debt back, but more immediately it may affect the rates at which the Government can borrow and the rates at which many of us borrow to fund a mortgage, which remains the most significant financial obligation for many households. If we trigger interest rate rises with tax cuts, we may find that increased mortgage payments quickly cancel out lower tax bills for many, and as I write this there are signs that this is happening. As I say, I think the Government is right to prioritise higher growth, but achieving that growth depends on confidence. Confidence among businesses to invest, but also confidence among households to buy the goods and services those businesses create. If households do not feel wealthier overall as a result of both tax cuts and mortgage rate rises, that confidence will evaporate. It is vital that the steps we take are not counterproductive.
I also believe that occasionally it is right to raise taxes. Both the NHS and our social care system need more money. It is not the only thing they need, but it is difficult to see how they meet increased demand without it. I voted quite recently to provide them with significant extra funding by means of an increase in the rate of National Insurance, meaning that the more you earn, the more you pay.
My sense is that, although nobody likes a tax increase, most taxpayers understood the need for this one. I am not persuaded that we should now reverse that increase. It is true that doing so would save a basic rate taxpayer £75 in 2022/23 and £175 in 2023/24, but the net cost to the Treasury of doing it will be £6 billion and £14 billion respectively in those years, and the NHS and social care still need the money. The Chancellor has said they will still receive it, but that must mean it will be provided from yet more borrowing, exacerbating the challenges I described earlier. We face big
challenges and the new Prime Minister and her Chancellor are perfectly entitled to propose big steps to meet them, but those challenges will only become harder to meet if we do not retain confidence in our capacity and our commitment to reduce that borrowing over a reasonable timeframe.