19 November 2023

Weekly briefing: Under-Statement


The resurrection of David Cameron was hailed by many in Westminster as a political miracle, not least because it knocked Suella Braverman off the front pages. But the country, it seems, is sceptical. In a brutal focus group for Times Radio, voters dismissed the reshuffle as ‘clutching at straws’ and described the former Prime Minister as being ‘brought out of the woodwork’. 

For me, though, Cameron’s return was a reminder of a time when the government showed some interest in shrinking the state. ‘Austerity’ doesn’t have many cheerleaders these days, but back in 2010 there was consensus on the need to reduce public spending. And the results speak for themselves – by the end of Cameron’s first term as Prime Minister the UK had the fastest growing economy in the G7.

Jeremy Hunt can make no such boast, but revised forecasts have given him £20bn of fiscal headroom for tax cuts at the upcoming Autumn Statement. Top of the list, as various authors have argued on CapX this week, should be making full expensing permanent. The current scheme whereby companies can deduct the full cost of new plant and machinery from their tax bill, has successfully incentivised investment. But as Sam Dumitriu argues, a temporary tax break is like a Black Friday sale – a great way to get companies to bring forward spending but a terrible way to give them the certainty they need in the long term. To change the overall amount of investment, rather than just the timing, the policy must be made permanent. My colleagues at the Centre for Policy Studies and the Tax Foundation estimate that this would boost the long-run capital stock by 1.5%, and deliver a 0.8% boost to wages and a 0.9% boost to GDP.

Another move the Chancellor is rumoured to be considering is raising the threshold at which businesses must register for VAT, which has been frozen since 2017. This would be eminently sensible. The threshold encourages small businesses to cap their annual turnover at just below £85,000, and its distorting effects are getting worse. But this is far from the only productivity-sapping perverse incentive in the tax system. Parents face a potential £25,000 penalty if they earn a penny over £100,000, as they lose their entitlement to ‘free’ childcare. That’s not just placing a limit on the ambitions of people who have children, it’s deterring people from starting families in the first place, contributing to the damaging gerontocratic transition Karl Williams discusses here.

Speaking of old people, Hunt is also said to be planning to reduce taxes on death. It’s another call back to the Cameron era, when the promise to scrap inheritance tax in 2007 was widely credited with scaring Gordon Brown off calling a snap election. The policy was jettisoned in the coalition agreement, and inheritance tax now stands at 40% for estates worth over £325,000. You can understand why the Chancellor wants to bring that down – it’s an unpopular tax that offends conservative instincts and only raises around £7bn a year. But given that only 3.76% of people are affected by it while millions are paying more in income tax as a result of fiscal drag, it will do little to ease the burden on ordinary people. 

The government’s problem is that voters won’t trust them on the economy as long as they’re feeling poorer – minor pro-business measures and hitting inflation targets won’t change that. 

With time running out, fractious troops and dire poll ratings, it’ll take more than the return of a former Prime Minister for Conservative fortunes to rise again.

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Alys Denby is Editor of CapX