Half a century ago, one of my Conservative predecessors as Chancellor, Anthony Barber, presented a particularly popular budget. That year, 1972, he set an ambitious GDP growth target and unveiled bold fiscal easing to achieve it. To those who warned that it could be inflationary, he responded with a reassuring message: on the contrary, demand would spur investment and, in turn, expansion on the supply side, and bring an abundance of goods and services for sale. The overall effect would drive prices down, not up. He said the skeptics – some would call them “pessimists” today – were wrong.
In the years of inflationary nightmare that followed, I often reflected on his mistaken belief that politicians can adjust both inflation and demand using tax cuts and other fiscal policy tools. . As Chancellor, I have sworn never to repeat that mistake. Nothing erodes the standard of living like unbridled inflation. In the 1970s we saw the impact of rising prices, crippling the economy and putting millions out of work. Savings have been eroded and investment has collapsed. I deeply fear that we risk repeating the mistakes of this decade.
Inflation is once again stalking the country, due to large supply-side shocks from the pandemic and the war in Ukraine – which is intimately linked to the sharp rise in fuel prices. It would go against the most basic principles of economic management for the government to stimulate demand through unfunded tax cuts in such circumstances.
Margaret Thatcher and I agreed that the only way to achieve substantial and lasting tax cuts was to first tackle inflation as well as an uncontrollable need for sector borrowing. public to put the economy back on sound footing – and that this formula was also a winning election. The logic of this approach is as true today as it was when I worked with her to revive the economy in the 1980s. It was also a logic adopted by my predecessor as Chancellor, Geoffrey Howe.
His 1981 budget – which I worked extensively on as Financial Secretary to the Treasury at the time – was widely criticized for the fiscal squeeze it represented. Then, as now, many argued that fiscal discipline was antithetical to growth. However, Sir Geoffrey knew what we must not forget now: public spending cannot be properly controlled in an inflationary environment. Margaret Thatcher, despite her long-term desire to cut taxes, fully supported the tax increases in the 1981 budget.
It was only through this work that I was later able, as Margaret Thatcher’s longest-serving chancellor, to bring about sweeping reforms to the tax system, with the basic rate of income tax reduced by 30 to 25%, and the upper rate lowered from 60 to 40%.
There is an additional risk in a reckless attitude towards public finances, beyond undermining the main electoral asset of the conservatives, considered the most economically responsible of the two main parties. The markets’ reaction to a government perceived as short-sighted is to demand higher interest rates when it buys up such a government’s debt – and we already have an annual interest bill of nearly $85 billion pounds. In addition, the currency of this country will tend to weaken, which adds to inflation; this is particularly painful for the consumer in terms of rising energy costs, since oil and gas are denominated in dollars.
Instead, we should stick to the path Rishi Sunak charted as chancellor and seek to embrace long-term tax reform as a precondition for long-term improvements in competitiveness. As Chancellor, Mr Sunak accepted my recommendation, reported in these pages as early as 2014, that the base rate should fall to 19p. This week, he went further by pledging to reduce – over time – the tax burden on income. It provides for a further lasting reduction in income tax to 16 pence, continuing the reforms I have started. Combined with measures to encourage business investment, such as its announcement of a 130% super-deduction for depreciation, these measures represent a coherent and prudent approach to improving the attractiveness of doing business in the UK.
Mr Sunak has refused to engage in debt-fueled Corbyn-style spending. Guided by the principles of Thatcherism, he laudably put plans in place to ensure that this generation pays for itself, rather than indebting the next generation with greater debt.
Although Liz Truss has many qualities, her plans now reportedly include around £60billion in unfunded spending/tax cuts – and her comforting message about the associated inflationary risk is, to me, uncomfortably reminiscent of missteps of the Conservative government of 50 years. from. I remember all too clearly the Labor government it led to and Margaret Thatcher’s determination that Britain should never again underestimate the central importance of a sound currency. The country will not forgive our great party if we forget this lesson.