Yes, it was possible to finance a lot more infrastructure investment through borrowing than previously thought thanks to ultra-low gilt yields, but even current spending would have ended up uncomfortably high. The pressure to hike taxes was thus already intense, hence February’s row about a mansion tax. Yet without the virus, it might have been possible to borrow a lot more for capital investment, increase current spending a little as a share of GDP and simply run a permanently bigger structural deficit. The Tories could have prayed for growth and winged it.
Such an approach is no longer credible. One-off increases in Covid debt to cover necessary expenditures such as furlough aren’t the problem. These are tolerable, albeit no free lunch: by pushing national debt closer to 100 per cent of GDP, the scope for borrowing a lot more to finance infrastructure projects narrows.
The real game-changer is that the economy will be permanently smaller than it would otherwise have been, and yet government expenditures will grow faster. The public transport system is bankrupt, for example, and unemployment benefits will prove much costlier.
Crucially, the Government doesn’t want to halt or reverse any of its other spending pledges. So when the dust settles next year, with GDP back to close (yet still below) where it used to be, we will discover to our horror that we are saddled with a large structural current deficit, camouflaged by money-printing and ultra-low interest rates.
Any sharp increase in the cost of borrowing – perhaps because of an American-led global surge that has little to do with British policies – would suddenly lead to a vast increase in an already large annual deficit. The risks of a full-blown fiscal crisis would be high enough to terrify any government. Hence why the pressure for tax rises is about to become irresistible: this is what happens when current spending shoots up permanently as a share of GDP.
So who will be hit? The Government promised not to raise income tax, VAT or national insurance. It might renege, of course: other planks of the manifesto have been rendered untenable. But if it sticks to its promises, what is left?
It is easy to speculate. The Office for Tax Simplification’s launch of a review into capital gains tax sounds ominous. Other forms of so-called “unearned” income could be targeted. Pensions tax relief keeps being squeezed: how long before a further crackdown? Red Wall voters wouldn’t be directly affected by any of this, but London and Southern Tories are certain to be hammered. Duties are another way to raise cash, but affect everybody: at some point, petrol tax is bound to be jacked up, citing “green” concerns.
I suspect that the Tories will have enough of a survival instinct to avoid introducing capital gains tax on primary residences. But in other areas, they probably believe that a brow-beaten, resigned public will simply blame everything on the need to pay for the coronavirus.
Taxes would already have been equal to 34.1 per cent of GDP in 2020-21 before the virus hit, joint-second highest since 1969-90 (35 per cent) and 1981-82 (34.1 per cent). Now, with the economy permanently smaller and spending higher, the Government will foolishly seek to extract more from our economy than any has dared or managed since the late Forties.
Does anybody in the Tory party really believe that aping Clement Attlee is the way forward? Does anybody in the Tory party really believe that HS2 or “green” spending are more powerful drivers of growth than low taxes? It’s one minute to midnight: the Government must either urgently get real on non-Covid spending, or plunge head first into an economic doom-loop.