You cannot isolate taxation from a discussion of spending and, especially, borrowing. In modern history there has never been a time when Government borrowing has been so cheap. True borrowing increases debt but if servicing debt costs virtually nothing then expanding deficit financing is responsible.
The National finances are not comparable with those of a household – or a business for that matter. Restricting the money supply when interest rates were high had its merits. But when rates are close to zero the monetarist case fails.
Increasing tax in a time of unprecedented economic threat – the double whammy of COVID and Brexit – throws petrol on the fire of economic uncertainty. At a simple level taxation is a limiting factor on expenditure and therefore on recovery. Growth is created by consumption and that is restrained by higher taxes.
Over the long term balanced budgets are a reasonable goal. But as in the 1930s spending an economy’s way out of recession in the medium term would work – and today at modest servicing cost. A major public expenditure initiative on healthcare facilities, transport, education and infrastructure is a better option than increased taxation. Time for Keynes not Thatcher.
One thought on “My advice for Mr Sunak – follow Keynes not Thatcher”
You are probably right Paddy in the short term but the national debt is alarmingly high and increasing massively. As with all debt other peoples money has to be repaid. The crunch for Britain will arrive when Covid-19 is suppressed or goes away in some significant way. The moribund economies of the UK and the world will boom. All that cash laying in peoples bank accounts will get spent as naturally, everyone wants to be released from the greyness of lock-down into all the pleasures that life can offer.
Booming economies create jobs, wage demands, price hikes and inflation. Overheating economies can only be controlled with high-interest rates. In a very short time, the government could find itself with double-digit rates. What then? Boom to bust. A double whammy of inevitable tax hikes and high-interest rates are almost certain.
Then without the single market or benefits of the customs union and the freedom of labour and business to work in the UK, I see history repeating itself and the early seventies looming. The Tories will likely be defeated and leave behind a Horlicks of an economy for Labour to deal with.