This approach to fiscal policy sets a dangerous precedent. What happens when the cost of living crisis really gets worse this fall, or if it doesn’t ease next spring? Can we now expect the chancellor to offer a lot of tax support as long as people’s real incomes are under pressure? What will you do, for example, when there is a real mortgage misery caused by higher interest rates?
While this relief package will mean that the level of public debt is higher than it would have been otherwise, it would still have to go down. While 2021/22 debt was £ 144 billion, this year it can now go down to £ 109 billion, instead of the £ 99 billion it would have achieved without this package.
But given this debt profile and the chancellor’s willingness to see loans fall more slowly, why did he drive the previous increase in national insurance contributions (NICs) by raising around £ 13bn? NICs are a completely bad tax and only fall on employment income, severely hurting employment incentives. In addition, the rise in NICs broke a clear commitment and ruined the Conservatives’ reputation as the low-tax party.
Equally, it has been a key part of conservative ideology to oppose unexpected taxes. Both are unfair and inefficient. While the Treasury has done its utmost to offset any adverse impact of this extraordinary tax with additional incentives for investment, the long-term impact will not be favorable. It will do no good for the UK’s reputation as a good place to grow and grow a business.
The only precedent that could suggest otherwise had a crucial difference. In 1981, the then Chancellor of the Exchequer, Geoffrey Howe, imposed an extraordinary tax on commercial banks under the alleged believer in the ultra-free market, Mrs Thatcher. However, the Thatcher government not only said it believed in tax cuts, but did so. In addition, the full thrust of its economic policy was in favor of the company in the context of free market competition. The same can hardly be said of this Government.
In addition to easing households by lowering energy bills, this package could directly slow the upward pace of the consumer price index and therefore do something to depress inflationary expectations and reduce inflation. intensity of the wage / price spiral. But that seems unlikely. The National Statistics Office is likely to rule that lowering the cost of energy will not reduce the contribution of utility bills to inflation.