What does Boris Johnson’s resignation mean for the economy? The pound started its rebound yesterday from a two-year low against the US dollar after Johnson resigned. A few economists were quick to point out though that it had dropped so much, there was only one place it could really go: up.
It’s very likely this leadership race turns into a competition over who would cut taxes hardest and fastest, which is no bad thing
Had Johnson managed a few more months in the role, we would have almost certainly seen some deficit-financed tax cuts, led by the new Chancellor Nadhim Zahawi. ‘We were 24 hours away from reversing the corporation tax hike,’ one minister tells me, which will rise from 19 per cent to 25 per cent for large companies. There is heavy awareness in the Prime Minister’s circles that he will be leaving office with the legacy of having taken the tax burden to a 72-year high (take a look at Michael Simmons’s write-up of Johnson’s premiership in seven graphs here). But all such plans are now on pause, after a slew of ministerial resignations led to Johnson stepping down as Conservative leader – a series of events kicked off by the man who, until this week, had the keys to the Treasury.
Both Sajid Javid and Rishi Sunak were pushed over the edge by No. 10’s handling of Chris Pincher and knowledge of his behaviour. But as I reveal in the magazine this week, Sunak was especially fed up with the Prime Minister’s economic philosophy of ‘cake-ism’ – insisting that higher spending and meaningful tax hikes were possible at the same time. He was also pushed to leave by the prospect of the joint speech from No. 10 and Treasury that the Prime Minister wanted to do. Sunak struggled with the idea of feeding a feelgood rhetoric to the public with no economic substance behind it.
So now we enter a leadership race, and we’re going to hear a lot about tax cuts. Suella Braverman, the government’s attorney general, has kicked it all off. Throwing her hat into the ring on live television on Wednesday night she promised ‘proper tax cuts’ alongside sharing her family’s story about coming to the UK.
As I say in today’s Telegraph, voters have every right to be sceptical about tax pledges after Johnson broke his manifesto pledge not to raise National Insurance. It’s very likely this leadership race turns into a competition over who would cut taxes hardest and fastest, which is no bad thing. But simply announcing tax cuts will not be enough; MPs must say what spending they’d cut or how they’d grow the economy to make them sustainable.
And claiming tax cuts will ‘pay for themselves’ (i.e. deficit funded tax cuts) is a big red flag. On Thursday the Office for Budget Responsibility announced debt levels are on track to reach 320 per cent of GDP in fifty years’ time, tripling from where they are now. Political spending promises weren’t sustainable even before Covid hit, and they’re definitely not sustainable now.
The Conservative party must start addressing this difficult truth: as desirable as tax cuts might be, slashing them without a serious strategy in place (particularly for economic growth) is not a credible answer. This conversation should start in the leadership race.
Comments