As a believer in free markets and small government, I’m hardly comfortable with the fact that the administration which I support has delivered the highest proportion of our national income being taken in taxes than has been the case for many years.
My prejudice is that, on the whole, individuals make better decisions on what is best for themselves, their families and their communities than government can make on their behalf. Consequently, we should tax them less but expect them to do more for themselves, rather than do more for them and charge accordingly.
Nevertheless and notwithstanding my prejudice, I approved of last week’s tax-raising budget because my honest-finance gene is stronger than my ideological gene: You have to pay for what you’ve spent. Whilst I’d prefer not to have government spend so freely (particularly when much of it was to stop enterprises trading and pay employees to do nothing), it’s too late now -the £470 billion bill is coming in and has to be repaid.
There is, of course, a vital agenda to increase investment, productivity and enterprise so that greater tax revenue is generated by increased economic activity and any chancellor of the Exchequer needs to be alive to the danger that his proposals to raise levels of taxation reduce the potential for revenue growth through economic growth. I think that Rishi Sunak was careful to avoid that danger last week in the way that he structured the tax increases for businesses and incentivised investment.
I have never however, shared the belief -that appears to be held by a number of my colleagues- that deficits can be very largely financed by cutting taxes in the expectation that revenues will rise sufficiently consequent upon the change in economic behaviour prompted by the tax cuts.
The ‘Laffer Curve’ as it is known amongst economists, predicts that in certain limited circumstances cutting tax rates can lead directly to an increase in tax revenues. Equally, an increase in tax rates can reduce the tax revenue taken. A chancellor would be negligent not to look for these opportunities and dangers, but it is never a panacea for filling a large deficit. And if it clinches the argument (it should, given the prejudices of those of my colleagues who embrace it) Mrs Thatcher certainly never believed in it.
We’ve spent the money, and we have to pay-up.