Rishi Sunak must ditch tax rises to avoid a 1970s-style recession

Driving back home from London to north Essex on Sunday night via the old A11 – because the M11 was closed – I passed more petrol stations than usual and was staggered by the huge discrepancies in fuel prices.

Several forecourts were selling petrol at 165p a litre, others had the price at 169p while diesel on some forecourts was as high as 173p a litre. For petrol cars, filling a 50-litre tank now costs around £82 while for diesel the cost of a tank is nearly £90. 

It’s a mind-boggling figure, especially if you work out how many hours someone on the minimum wage – around £9.18 an hour – must earn to pay to fill their tank to get to work. 

At some petrol stations, drivers are reporting that prices are changing by the hour and, according to Experian Catalist, fuel is now at a record high, with the average cost of a litre of petrol on Sunday hitting 163.5p and diesel 173.4p.

What’s more, retail prices could keep increasing despite the downturn in the price of crude oil after recent highs triggered by President Putin’s war on Ukraine. Another reason why pump prices are soaring is more simply due to  fuel supply chain manipulation made easier because there is less competition on the forecourts than there used to be as so many smaller petrol stations have been squeezed out. 

It’s why Howard Cox, founder of the FairFuel campaign group, in an article on the site, is right to argue that the government should investigate pump prices – as President Biden is doing in the US – because of the monopolistic behaviour of wholesale suppliers. 

The politicians can’t say they haven’t been warned. Earlier this week oil experts told MPs on the Treasury Select Committee that petrol could easily jump to £2.50 a litre, while diesel could hit £3 and may be rationed soon. 

Prices were already rising after the supply chain bottlenecks caused by the global lockdowns but without question Putin’s invasion of Ukraine has worsened the situation because of sanctions – and self-sanctioning by many oil suppliers. While the UK imports only a small amount of oil and gas from Russia, about 18% of diesel imports – fuel used mainly in industry – come from Putin’s refineries. 

As well as soaring pump prices, households are also having to deal with soaring electricity and heating bills, with energy costs set to double to £4,000 by the end of the year: our monthly oil bill has already doubled in the last few months with the price of domestic oil now at a high of 91p a litre. 

Making matters worse for households already facing a squeeze on the cost of living front, we are due to face a 1.25 percentage point rise in National Insurance contributions in April. This works out as a 10% tax increase on employees and adds another £600 to the average homeowner’s bill. 

There’s more hardship to come: the plan to freeze income tax thresholds is a de facto stealth wealth tax while millions of pensioners who are on fixed incomes will suffer as their income will be decimated by inflation. 

The latest price rises – particularly those for wheat, fertilisers and other commodities – have led some forecasters to predict double-figure inflation by the end of the year and lower than forecast GDP growth.  

Add in today’s interest rate rise of 0.25% to 0.75% – which looks tiny but will hurt those with mortgages, business loans and credit cards – and the outlook is indeed bleak. 

It’s certainly not a pretty picture for Rishi Sunak to paint when he stands up to present his spring statement next Wednesday. It’s also not quite the picture the Chancellor may have been hoping to give when he was out and about some weeks ago on manoeuvres preparing for a potential leadership campaign. 

Remember that, and Sunak’s bizarre, if not disingenuous, promise that he was philosophically a low-tax man? That all seems a long time ago now, another era.  

Yet there are levers the Chancellor can pull to ease the pain for the public, and perhaps most importantly of all, put some throttle into the economy to kick-start growth in these fragile times to avoid a 1970s-style recession at the end of the year.  

The shape of the world’s geopolitics has been turned on its head since Vladimir Putin’s aggressive war on Ukraine, so there is no shame for Sunak in saying that he must adapt to the wilder topography and put his plans to balance the books on hold. 

What Sunak needs to impart during this Budget is the most vital ingredient of all – confidence, and enough confidence for businesses to want to invest and for families to plan ahead.

Budgets are as political as they are economic and sometimes doing nothing – or as little as possible – is the best strategy of all, particularly when circumstances have altered so dramatically. As someone rather famous once said, “When the facts change, I change my mind. What do you do?”

Well, Sunak should do three things immediately: abandon the NI hike, drop plans to raise corporation tax next year and cut the green energy tax on energy bills. His £150 council tax rebate – and the £200 loan – are silly ideas, complicated, fiddly and intellectually dishonest. 

He should be bolder and cut the green levy from energy bills and have a proper policy for helping consumers insulate their homes which is not means-tested. (Tightening up rules to force builders and developers to build decent, energy efficient homes is another priority rather than the usual sticking plaster approach.)

What else can Sunak do to alleviate the pain? He has some wriggle room. His plan to freeze income tax thresholds was always a crafty one and, according to new analysis from the Institute of Fiscal Studies, could now raise as much as £23 billion because of inflation rather than the forecast £8 billion. 

Leaving tax thresholds as they are is not such a bad idea, so long as these other taxes don’t rise. To date, Sunak has resisted all calls to drop the NI hike, mainly because he argues the revenue is needed to pay for the social care levy part of NHS spending. 

Yet he can easily wiggle out of this by showing that higher tax receipts overall will help plug the gaps left by not putting up NI. Plus, with interest rates still so historically low – at least for the government to borrow at – he can always take on more debt.

If Sunak wants anyone to believe that at heart he is a low-taxer, he can start by not being a tax-raiser. Not quite as good as tax cuts – which would be the smart thing to do – but it would be a start. Allowing people to spend more of the money they have earned how they wish is always the wisest policy.