The return of Liz Truss to the political fray has inevitably sparked a barrage of derision and outrage. The former prime minister has been widely criticised for her 4,000-word essay in last weekend’s Telegraph, followed by an hour-long interview on Spectator TV.
Since late October, having been ousted from No 10 after just 49 days, Truss had remained tight-lipped. But she now makes a bold claim – that a “powerful economic establishment” scuppered her seven-week premiership.
“Large parts of the media and the wider public sphere have become unfamiliar with key arguments about tax and economic policy,” Truss wrote. “Over time, sentiment had shifted Left-wards”. Whitehall’s “strength of economic orthodoxy and its influence on the market”, she argued, meant “the forces against [her tax-cutting policies] were too great” for them to succeed.
“A period of silence would be helpful,” sniped Tory MP Caroline Nokes, mindful that Truss is associated with last autumn’s financial turmoil and sharply rising interest rates. Her tax cuts were “clearly” wrong, remarked Energy Secretary Grant Shapps.
Yet for all the mudslinging, the shortest-serving prime minister in history has moved the needle on the economic debate over recent days – and at a crucial moment.
For it is little more than a month until the spring Budget on March 15 – the last chance for meaningful policy intervention ahead of crucial local elections in May. And tax cutting, or at least not raising taxes, is now firmly on the agenda.
Conservative MPs, in increasing numbers, are warning Chancellor Jeremy Hunt that a failure to act on tax, and soon, could spell a “fin de siècle” – the end of an era – for their party in government.
If a general election was held now, polls suggest the Tories could come third behind the Scottish National Party with just 45 seats. And while the UK has so far avoided recession, this cost of living crisis has a long way to go.
That’s why Truss’s intervention has galvanised the Conservative Growth Group – a caucus of 50 or so Tory MPs seeking to reinvigorate, not Truss’s leadership, but her “supply-side” tax-cutting agenda before the next general election.
Tax revenue as a share of GDP is at a 70-year high. Yet the Chancellor says he will only reduce that tax burden “when there is headroom” in the public finances. Until then, Hunt insists he is sticking with the plan announced by Prime Minister Rishi Sunak in March 2022 when he was chancellor – to raise corporation tax from 19pc to 25pc in April this year.
That’s the tax rise Tory MPs are now targeting. They’re pushing, in numbers that threaten the Government’s 80-seat majority, for Hunt to announce in the Budget that corporation tax is staying put.
“There’s trouble ahead,” says Steve Hardeman, managing director of Clevedon Fasteners. This company – founded in 1939 to make the rivets used to build Spitfires – sees a new threat on the horizon.
Hardeman and his 30-strong workforce export specialised fastenings around the world. “Everything is coming together to make April and the subsequent months very tough indeed,” he told me last week, as we walked around his Sutton Coldfield factory.
Since lockdown, Hardeman’s cost-base has ballooned – with the price of coiled mild steel and stainless steel, his two main inputs, doubling and tripling respectively. Like many firms, his energy costs have also surged over the last year – from £5,000 to over £16,000 a month.
In April, those bills will rise further – with government assistance to be cut for all but the most energy-intensive companies. “And on top of that,” says Steve, “corporation tax is going up, if ministers are stupid enough to do it – just as our energy costs rise even more.”
Corporation tax is payable on profits above £50,000, with the full rate paid above £250,000. But this hefty six-percentage-point tax hike will still hit the cash flow of tens of thousands of relatively small and-medium-sized enterprises – the SMEs accounting for more than half of UK output and two thirds of jobs.
It seems perverse for the Government to clobber such firms now, having spent hundreds of billions keeping them alive during lockdown. It strikes me that this sharp rise in corporation tax when so many firms remain vulnerable, far from raising revenue, will cost the Treasury money instead.
“Manufacturers like us operate on slim margins – and after all the pandemic traumas and ongoing supply-chain pressures, this energy-corporation-tax double whammy could cause many firms to fold,” says Hardeman. “And those that do survive will definitely invest a lot less – so how is the economy meant to grow?”
Last weekend, Truss described this Sunak-Hunt corporation tax rise as “economically detrimental”, focusing minds on the Tory backbenches. After all, from 2010 to 2017, as the corporation tax rate fell from 28pc to today’s 19pc, receipts doubled from £31.7bn to £62.7bn – that is, 2.4pc to 2.9pc of GDP.
This reflects the higher investment generated by a more competitive tax regime – the sort of dynamic policy impact economic models built by Whitehall mandarins so often fail to capture.
“Tax cuts don’t pay for themselves and wouldn’t improve the long-term financial position,” insists the Office for Budget Responsibility. The fiscal watchdog predicts higher corporation tax will raise £18bn a year by 2026, rejecting any notion lower rates can bolster the public finances.
Last October, though, the Treasury observed: “There is a range of academic evidence which suggests low corporation tax can boost investment and growth, and therefore lead to higher tax revenue.”
When Truss was in power, with inflation and interest rates rising and the Government facing a massive bill for soaring energy subsidies, financial markets were skittish.
Now, inflation is falling, rates may have peaked – and lower wholesale energy prices mean subsidies, and related government borrowing, have been much lower than feared.
Investors are now more concerned about the Chancellor stifling growth than they are about fiscal profligacy. If corporation tax was frozen in April, far from rebelling – as they did under Truss in September – I reckon financial markets would cheer.
The great thing about freezing a tax that’s been expected to rise, is that it feels like a tax cut. And right now, a bit of “feelgood factor” is what this economy sorely needs.