By Graham Brady
7:33PM GMT 14 Feb 2013
Suddenly, it’s all about how much money you have in your pocket. Ed Miliband conveniently forgets the years he spent in the Blair/Brown government of stealth taxes and pension raids and declares that the next election will be about living standards. The fact is that the prices of energy, fuel and food have been rising ahead of earnings for years, but until the banking crisis struck, many people were riding high on a wave of borrowed money; it was only the most prudent or those on fixed incomes who felt the pain. Now this Government has the massive challenge of lifting the burden from people’s shoulders at the same time as nurturing growth and raising the public finances from the ocean floor.
This week, Mervyn King has avoided talk of green shoots but detects “cause for optimism” with a “recovery in sight”. But we also know that more robust growth is essential if we are going to start cutting the national debt, instead of adding to it. The Bank of England has pursued the loosest monetary policy in history – not just ultra‑low base rates but a £375 billion injection of “quantitative easing”. It may have staved off the threat of deflation in the darkest days of the banking crisis, but now the Bank has to worry about above-target inflation for the foreseeable future; so we can’t look to further monetary stimulus to bring the vigorous growth that is needed.
Over the past two years, George Osborne has restored credibility to the public finances, keeping the cost of borrowing down; the public debt is rising much more slowly than under Labour, but it will be years until we can even start to pay it off. Sensible steps have been taken to bring forward infrastructure development, but most of these projects take too long to get off the ground, and therefore too little benefit is felt now. In any case, saddled with an enormous legacy of debt, it is obvious that we can’t borrow the funds for a further fiscal stimulus either.
Room for manoeuvre is tight. We can’t print money, we can’t borrow our way to recovery, and we can’t tax our way to growth either. The Bank Governor has urged the Treasury to look at supply-side reforms. These might include further labour-market flexibility – it is the legacy of the Thatcher government’s reforms that is keeping unemployment down in the current crisis – but they should also include cuts to the taxes that hold back investment and demand. The Chancellor has recognised the case for this by setting out staged cuts in corporation tax, due to come down to 22 per cent next year, from Gordon Brown’s 28 per cent. He should go further. While tax is a necessary evil, experience tells us that some taxes are more damaging than others. Corporation tax, fuel duty and capital gains tax impact more on investment, business costs and profitability than income taxes or VAT. In what David Cameron has characterised as a “global race” for competitiveness, it is vital that Britain should levy these more damaging taxes at levels that allow us to compete internationally.
Last week, PricewaterhouseCoopers (PwC) highlighted a glaring example. In its review of the economic impact of Air Passenger Duty, it found that maintaining the highest aviation tax in the world was a serious impediment for a global trading nation. Using the same dynamic modelling techniques as the Treasury, PwC found that abolishing this tax altogether could pay for itself as the Government gleaned extra revenue from growth in trade and employment. Scrapping this unproductive tax would boost inward tourism as well as helping British people afford a holiday – but most importantly, we could expect an immediate year one economic boost of nearly 0.5 per cent of GDP. Not to be sneezed at in these days of anaemic growth.