Who would have believed on 24 June 2016 that Brexit would have forced a complete reversal of half a century of Conservative Party thinking? Yet, that is what happened yesterday when reality finally caught up with Chancellor Rishi Sunak and he dashed any hopes of Britain ever becoming a Singapore-on-Thames. He delivered a budget that would not have embarrassed John McDonnell and was cheered by the Tory stooges MPs sitting behind him for doing so.
Dreams of a low-tax, lightly regulated, fast-growing Britain died on the floor of the House of Commons yesterday, make no mistake. His speech was full of Tory soundbites but could not disguise what the economic facts of life have been telling him for five years.
It was left to the Office of Budget Responsibility (OBR), Paul Johnson of the Institute for Fiscal Studies (IFS), and Tony Blair’s Institute for Global Change (TBI) to set the record straight.
Without Brexit “most of the past year’s £40bn tax raid would have been unnecessary”
Firstly, responding to the budget the TBI said:
“While the Chancellor trumpeted newfound ‘Brexit freedoms’ to reform alcohol duties, what he didn’t mention was that Brexit has cut annual tax revenues by around £30bn. This means that without the Brexit shock most of the past year’s £40bn tax raid would have been unnecessary.”
In other words, Brexit has shrunk the size of the economy to such an extent that while most departmental spending has reduced to austerity levels and will remain so for years, we need taxation touching figures not seen since Clement Attlee was in office in 1950, plus significant borrowing, to support it. This is a truth that cannot yet be spoken out loud in Tory circles. Singapore-on-Thames it is not.
Boris Johnson has banned the ‘B’ word, so Brexit didn’t get a mention either, although as the TBI points out, Britain’s exit from the single market has hit our £2.2 trillion economy for 4 percent of gross domestic product (GDP), worth about £88bn. Taxation at 36 percent of GDP, as the OBR claims, means tax revenue is down by about £31.5bn, precisely the amount raised by all the corporate and personal taxes Sunak announced last March.
Brexit has effectively forced Sunak to raise taxes by “more this year than in any single year since Norman Lamont and Ken Clarke’s two 1993 Budgets in the aftermath of Black Wednesday”, according to the OBR.
The size of the state is being permanently increased
In their fiscal outlook, published alongside the budget, the OBR says (page 18):
“The Chancellor uses around half of the improved underlying picture and increase in tax revenue relative to our March forecast to permanently increase the size of the post pandemic state” [our emphasis]
They point out that even allowing for some near-term growth, public spending after 2024/25 will stabilise at 41.6 percent of GDP – “the highest sustained level since the late 1970s.”
Think about this, because of austerity, government spending across many departments has only just returned to 2010 levels. But in order to maintain this parsimonious state after Brexit, taxation apparently needs to be at a 75-year high and government spending at a 50-year high (as percentages of GDP). We are therefore paying more and more for less and less, because the economy is smaller than it would have been if we hadn’t left the EU.
Household incomes are being squeezed
Next, Paul Johnson, the respected director at the IFS, tweeted “‘Deep in the bowels’ of the OBR document are ‘very disappointing’ figures for growth for households’ disposable incomes, with the ‘expectation for household growth for the next five years’ looking ‘pretty stagnant’ at 0.8% per year”:
He has also pointed out that next year a median earner will see their pre-tax pay just about outpace inflation, but after the extra income tax and NICs, take-home pay will fall by about 1 percent, or £180 per year, in real terms.
Inflation was expected to reach 4.4 percent next year but this was before the latest sharp increase in energy prices, so the OBR now says it will be closer to 5 percent and may even be higher.
Alongside rising global energy costs, Sunak and Johnson have cut us off from the EU single energy market, burdened industry with extra taxes, crippled access to our biggest overseas customer, restricted the labour supply and still expect businesses to invest to raise productivity over the next few years to spur growth and raise household incomes. If it doesn’t happen (and it’s unlikely to), it will be even higher taxes or a return to austerity on steroids
Brexit twice as bad as Covid-19 for the economy
Richard Hughes, chair of the Office for Budget Responsibility, has said that Brexit will have twice the impact on the economy as that of the covid pandemic. Those who still believe that the prime minister is ‘doing his best’ should reflect on that. Essentially, in economic terms, he is deliberately giving us two more global pandemics after conning the people that this was somehow a desirable outcome.
Finally, Dan Hodges, a Brexit-supporting columnist at the Daily Mail tweeted “Boris and Sunak haven’t parked their tanks on Starmer’s lawn. They’ve driven them into the living room, climbed out and started ransacking the fridge”:
However, in the cold light of day he might also want to reflect on what’s really happening. Johnson is now gaslighting both his own party and the pro-Brexit press. He is doing to the Conservatives what Tony Blair did to Labour in 1997, but in reverse. In Blair, Labour had a popular election winner out of touch with much of left-wing grassroots thinking. Johnson is doing the same but alienating the right of his party.
It did not end well for Labour, which is still suffering from the painful divisions of the Blair-Brown years. Hodges may realise that this eventually could be a far bigger problem for the Tories.
Anyone listening to Simon Clarke MP, chief secretary to the treasury, on BBC Newsnight last night would have witnessed a low-key Tory Clause 4 moment. He vigorously defended high taxes and high spending. There will be no going back from that. A Rubicon has been crossed. His words are going to be taken down and used in evidence against him.
With no sign of any massive cut in the regulatory burden after Duncan Smith’s TIGRR delivered its report in April, and with taxes headed for the highest since 1950, Sunak has ended the Tory Party’s dream of Britain becoming a Singapore-on-Thames and set them on course for a nightmare.
