Why Sunak has only one choice: repeat the success of the golden decade and cut taxes

Forget economics, says Neil Record. Which is a little bit funny as Record is chairman of the Institute of Economic Affairs, has a Masters degree in the subject and worked at the Bank of England as a macroeconomist before switching his eye to the ups and downs of the currency markets.

Like an ex-smoker, Record says he’s become increasingly disenchanted with economists and their forecasts. “Economics is not a science so trying to predict the future with models is like building castles in the air. Not surprisingly, economists have a pretty bad track record of forecasting.”

Instead of looking at economic models to find out how best to boost growth in a post-Covid-world ( if there ever is one) Record turned to history to discover what works best.

To do so, he dug into the public accounts over the last 40 years – which is in itself a chore as the accounts are opaque and designed to keep even the professionals at bay – to discover the magic growth gene.

“I looked back at periods of UK economic success and growth within the past 40 years and identified the best decades within that period, and then analysed the taxation, fiscal and regulatory policies that helped create those successful periods.”

What works is no mystery. The best period for strong GDP per capita and productivity growth was 1993-2003, the post-ERM era during when Sir John Major was Prime Minister and his Chancellor was Kenneth Clarke, through to the first years of Tony Blair as boss with Gordon Brown lodged at the Treasury. Although, as Record also reminds us, the groundwork had been laid by Lady Thatcher with her reforms in the 1980s: “Remember that in 1979 you could only take out £200 if you were going abroad.”

So if Boris Johnson and Rishi Sunak want to repair the terrible damage inflicted on the nation by Covid-19, Record suggests they create a similar era of lower and simplified taxes to revive the economy and grow national income.

It’s why he has penned a new IEA report – The Chancellor’s Post-Pandemic Choices – and an open letter signed by 30 top businessmen and women, academics and politicians ( and some economists) to the Chancellor urging him to be bold and adopt similar measures to those of that golden decade.

Record told Reaction: “If I were sitting next to Rishi Sunak and he asked me how he should revive the economy, I would ask him two questions: does he want to grow government revenue or does he want to cut government spending?” And if Sunak says the former – which is obviously the superior choice – there is only one way forward and that is to slash and simplify tax. Indeed, Record’s report argues for cuts in corporation tax, a top rate of income tax of 40%, stamp duty of no more than 4% to help the housing market and a light, regulatory burden across all sectors. VAT should be cut to 17.5%.

In the report, Record adds: “The conditions that pertained at the time make a convincing case for the policies needed to stimulate and sustain our economic recovery. The chancellor and his colleagues at HM Treasury face two major and very difficult to resolve issues: highly stressed public finances, and a lack of labour productivity growth (leading to stagnant real wages and living standards). This government may not choose to adopt some or any of these successful policies. At the very least, however, this evidence should weigh on any decision-making.”

And this is why. As Record points out, government revenue grew between 1993 and 2003 by an average of 4.3% per year, meaning government income over the ten years period rose by a stunning 51%. For a brief period at the end of the 1990s, there was a government surplus while the UK’s  public sector debt as a percentage of GDP hovered between 30 and 40%. Today it is above double that at 100%.

So what was so magical about this period?

In brief, income taxes in 1993/94 were divided into three rates – as they are now – but the rates were different. But the difference between then and now, Record says, is the top marginal rates were modest, allowing for a bigger overall tax take from the richer in society and also meant fewer people were trying to avoid paying tax. “The government’s desire to level up will of course hit the amount coming from across the richer in society.”

Then, the lower rate of tax was set at 20%, the basic rate at 25% and the higher rate at 40%.

Over the following years, the basic rate was then reduced in the following years to 24%, 23% and then 22%. The rate stayed at this level until the tax system was reformed in 2008/09 when the basic rate was set at 20% and the higher rate stayed at 40%.

But then David Cameron’s Conservative government jacked up the top rate in 2010/ 2011 to 50% top rate of tax. This was then reduced to 45% in 2013/2014.

VAT rates have also vacillated. In 1993, the VAT rate was also lower at 17.5%. It stayed there until 2009/10 when it went down to 15% for one year, before rising to 17.5% and to 20%, where it is now. By contrast, stamp duty on homes was never higher than 4%.

What Sunak absolutely should not do, says  Record, is raise taxes. “That would crush any recovery. What we need is the reverse –  incentives for young entrepreneurs to start their own businesses, get those famous animal spirits going again.”And that’s not easy in today’s more restrictive environment. “We already live in what I call a regulatocracy where starting a business – or running a business – is tied up in the most extraordinary regulations from wokeness to age discrimination which make it hard to run anything today.”

Record appears to know what it takes to run a business. He was 30 in 1983 when he set up his currency business. “I received two letters: one from the tax man and one from VAT, that’s it. I’m not sure I could do what I have done if I were building the business now.”

Today his company – Record Currency Management – is listed on the London Stock Exchange.

But he believes Johnson and Sunak have to go beyond the achievements of their successful predecessors at Number 11. If the UK is to repeat the success of that “golden age” again, Sunak needs to take an axe to the tax system which is “too complex, too distortionary, and not sufficiently investment-friendly”.

“We need major tax simplification, and a shift in the burden of taxation from more distortionary to less distortionary taxes. We need reforms to planning and housing subsidies so that the next generation can afford to buy their own homes.”

If not, the Chinese and other growing world powers will eat us for breakfast, lunch and dinner. “It’s quite simple. The Chinese decide to build a factory. They don’t mess around, they get it done in six months. If we are not careful, they will be manufacturing everything we need in the West. There will be nothing left here for us to produce.” What’s more, lockdown has shown an extra dimension to globalisation: the era of Zoom and WFH or WFA means the work an employee in the UK earning £60,000 a year can just as easily be done by someone living in Estonia earning half that.

We need to wake up, he says, “I’m an optimist by nature and believe we can get this right. But creating these conditions for growth needs strong leadership from the top down.”

And if we don’t? Well, Record is on record as saying: “We have about ten years before the young lose confidence and I fear we will see revolution on the streets.”