If only we could solve our problems by cutting taxes.
Prompted, no doubt, by the debates between the candidates in the Conservative leadership contest, a large number of constituents have contacted me to suggest their own proposals for tax cuts or to support those being pursued by the candidates.
I reiterate what I have said previously: I am glad that the focus is on cutting the tax burden. I believe that we know best what our priorities are and how to pursue them, we need to be allowed to keep more of what we earn in order to do exactly that. The quid pro quo however, is that the state does less and takes less from us, but nobody appears to keen to engage in this important element of the debate.
If the burden of taxation is too high and we want to reduce it, then clearly there must be a commensurate reduction in government expenditure equal to the reduction in taxation. Either that, or we borrow the difference in the expectation that our children’s generation will pay off our debts – assuming, of course, that financial markets would continue to lend to such profligate borrowers.
The counterargument is that tax cuts will pay for themselves by stimulating economic activity so that the economy grows and generates greater tax revenues. I accept entirely that there are circumstances in which this will be the case, particularly where the tax cuts are aimed at stimulating investment to increase productivity. The danger lies in the time that it will take for this stimulus to take effect.
So, is the UK economy in a state that we can contemplate a tax cutting agenda immediately?
We certainly need to encourage investment to increase our productive capacity because our economy has been dogged for years by low productivity.
In my postbag however, the demand is for tax cuts that will address our ability to spend and consume: my constituents want more money in their pockets now, so that they can restore their living standards in the face of rising prices. Whilst this is entirely understandable and would certainly be popular, it would be a disastrous course to take.
We already have inflation because of a too expansionary monetary policy that was pursued by the Bank of England for too long. This has been exacerbated by the impact on world commodity prices resulting from the war in Ukraine and very from significant problems with supply chains caused by the bumpy international recovery from the pandemic. The UK economy is already at full employment: we have shortages of both skills and key inputs to the production process. Tax cuts targeted at our spending power in these circumstances will do nothing to promote real growth in the economy, they will simply drive prices up further. We’ll be left with more inflation and more debt.
Beware of any offer of easy answers: If it sounds too good to be true…then it probably isn’t true.