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The Guardian - UK
The Guardian - UK
Comment
Will Hutton

Jeremy Hunt, instead of blowing £10bn on tax cuts, why not spend it on boosting growth?

Huge hands cut off the wings of an aircraft as a couple watch, a pile of suitcases sitting on the runway.
Illustration by Dominic McKenzie. Illustration: Dominic McKenzie/The Observer

Britain is unravelling in front of our eyes. No week passes without another dial on the economic, social and security dashboard flashing either amber or red. Thus last Friday we learned that after the closure of our last remaining steel blast furnaces in Port Talbot, Britain will become the only G20 country without the capacity to make virgin steel.

Meanwhile our Nato allies are increasingly concerned that Britain’s army is shrinking so fast that our military capacity is doubted. Fresh analysis from the Financial Times revealed that outrageously expensive housing means that most young adults now live at home until 34 – with all that means for family formation and the ability to adopt the full mantle of adulthood.

Yet we are told by the prime minister and chancellor not to worry. Tax cuts, the universal Tory panacea, are on the way. The “plan” is working so well that there will be not one but two fiscal events before the next election – the budget and the autumn statement – both aimed at delivering “tax cuts”. The chancellor argues that more dynamic economies in Asia or the US have lower taxation as the platform for their wealth generation, while the prime minister insists that low taxation is a moral proposition: people should choose how to spend their money, not the state. The housing market may be broken, deindustrialisation continues apace and our defence effort is enfeebled – but the national priority is tax cuts.

It is not. Self-serving American rightwing thinktanks keen to feather the nest of their plutocratic funders make a specious, ideological economic argument for tax cuts but, as the Institute for Government reported, there is scant evidence that they work. Economic dynamism comes not from low taxation but from high public investment and smart ways in which governments help high investment businesses better manage risks. Thus the US high tech sector is symbiotically linked to high US defence spending and in particular innovation spearheaded by the Defense Advanced Research Projects Agency (Darpa). Equally, whether in Singapore or Indonesia, the common thread across Asia is state-led investment and successful industrial policy. Of course, genuinely confiscatory tax rates force enterprise underground – but the idea that the current British tax regime is that confiscatory is bonkers. As for the moral argument for tax cuts, it ignores the case for what economists call “public goods”, ranging from health and education to libraries and museums. All are most effectively and cheaply provided collectively. That has always been true, but the better off that people become, the more they want better healthcare, education, ready access to justice, to start families when they choose, efficient public transport, to experience great art – and to feel secure. Richer societies want more public goods – not fewer.

None of this challenges the monomaniacal Tory obsession with tax cuts. The dishonesty unleashed by Brexit now suffuses its pitch to the electorate. A Brexit government cannot acknowledge that tax rates have to go up to compensate for the black hole in receipts caused by output now running annually at about £100bn lower because of Brexit and thus yielding less tax. But the omission means it becomes challenging to explain other truths – that taxes have risen because with an ageing population the demand for health and social care has soared; defence spending must be increased; public services, cut to the bone, cannot be cut further as courts crumble and local government goes bankrupt; and that for bridges, tunnels or electrification we have to invest more. Instead, the invitation is to blame welfare spending for all public spending pressure and say if that is addressed the overriding priority of cutting taxes is possible.

Yet truth will out. Britain’s real challenge is not to further disadvantage the poor but to devise its own smart ways of lifting investment. One means is to hand. The government does not need to invest and borrow on its own account, it can do it at arm’s length by offering to guarantee commercial bank loans to big investment projects like infrastructure – and pay out only rarely when and if the guarantee is called on. Britain is already experimenting with this model through the UK Infrastructure Bank’s £10bn “sovereign investment guarantee” to private banks that lend on infrastructure projects. None of the £10bn counts as public borrowing; only the much lower, separate £4.5bn risk capital the taxpayer puts up to back the guarantee. Bankers I talked to last week are enthusiastic; through the guarantee they are increasing green infrastructure lending they would not otherwise have undertaken.

But it’s all too small scale. The National Infrastructure Commission says British infrastructure spending needs to rise by at least £30bn a year. So here is the real choice. To use the potential “headroom” of £10bn for tax cuts: or to use the same money to treble the investment guarantee to £30bn and launch an infrastructure revolution. Public squalor can be redressed. Taxes don’t have to rise: we can have an investment boom and drive for net zero while they stay the same.

Equally, if tax receipts generally are at a 40-year high according to the House of Commons library (not the 70 years bandied about by anti-tax campaigners), taxes on the wealthy remain at a 40-year low. Wealth – in housing, land, pensions, art – has risen from three to seven times national income over the past 40 years. But the tax contribution of the wealthy remains stuck at 3.5% of national income – unsustainable, as both the Institute for Fiscal Studies director, Paul Johnson, and Labour MP Liam Byrne argue, the latter in his powerful book The Inequality of Wealth. Wealth owners must all contribute more to the exchequer than they currently do. Nor is it just a matter of fiscal justice; the pattern of demand that results – for underground cinemas, luxury yachts, private planes – pulls the economic structure out of kilter.

To starve the provision of public goods to succour the already gilded lives of the plutocratic rich is nonsensical. With a more balanced tax base Britain can raise public investment, repair its stricken public services and trigger the growth that will yield higher tax revenues so allowing the tax paid by the mass of ordinary taxpayers to be capped – and start to come down. Instead of Labour retreating from its £28bn green prosperity plan, as it is reported to be considering, it should start making this larger argument, of which its plan is part. The electorate knows that the country is unravelling and yearns for a credible alternative. The task is to spell out what that means – not collude with Tory tax-cutting monomania.

• Will Hutton is an Observer columnist

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