One thing came across loud and clear from Rishi Sunak’s speech on the economy on Monday; if the “fiscal space” for it exists, tax cuts will in future always be prioritised over spending increases.
By effectively making this pledge, the Prime Minister hopes to create a clear demarcation line with Labour’s Sir Keir Starmer, who by progressively shifting on to the centre ground has attempted to make himself virtually indistinguishable from the incumbent Government on economic policy and management of the public finances.
It’s now safe to vote Labour again, Sir Keir has been telling Middle England. We won’t be rocking the boat. This may be a comforting message for some, but in reality it’s snake oil.
Mr Sunak hopes to tease out the ever more evident differences. What do you prefer? More money in your pockets via tax cuts, or higher spending, higher borrowing, more intervention in industry and higher taxes to come? There’s a clear choice.
Wednesday’s Autumn Statement should contain tasters on the new approach, with possibly even a small cut in income tax and/or national insurance announced as a downpayment on bigger goodies to come in the Spring Budget.
It marks a change from the policies adopted after the debacle of Liz Truss’s premiership.
Since then, taxes have risen sharply and through the mechanism of “fiscal drag” – where tax thresholds remain frozen rather than being raised, as is normal in line with inflation – are set to continue rising for years to come. Millions will be drawn into paying income tax for the first time, or into higher-income tax bands.
So when ministers talk of the growing fiscal headroom for tax cuts, all they mean is giving voters back a little of the embarrassment of riches the Exchequer is enjoying from the “stealth tax” of fiscal drag.
All the same, what’s promised is beginning to look significantly different from the Labour alternative.
The country faces a choice about how we grow the economy, Mr Sunak said: “Do we continue with the big government, high spending, high borrowing and high taxes that were necessary through the pandemic? Or, as we believe, should we change our approach and grow the economy through the dynamism of the private sector?”
It’s a tricky intellectual somersault that Mr Sunak and his Chancellor are trying to pull off.
Only last September, Downing Street said there was no room for tax-cutting at all, and that in any case, it would run counter to the greater purpose of getting inflation under control.
Since then, the rate of inflation has fallen significantly, but unfortunately for the Government, almost any cut in personal taxation could still be seen as inflationary. What is the point of the Bank of England pushing down on demand by raising interest rates if the Government is only going to counter-stimulate through tax cuts?
Yet if it is only a small cut, or as expected the bulk of the cuts are focused on supply side, business taxation, the Office for Budget Responsibility would probably conclude it is unlikely to make a difference, allowing Downing Street to reconcile the two positions. Badly down in the polls, the Government needs to pull something out of the hat.
Mr Sunak is attempting to break away from the notion that the two main parties have coalesced around a similar approach to the economy. His private sector solutions versus Sir Keir’s public sector ones is the message. It may not work, but at least we are starting to see a proper choice.