Rishi Sunak’s potential tax rises would guarantee a recession

It could be National Insurance. It could be income tax. Perhaps it could even be a rise in VAT. We don’t yet know what taxes Rishi Sunak and his Chancellor Jeremy Hunt have planned for their fiscal statement later this month. One point is surely clear, however. There will be no point in pretending that those can be paid for by either ‘big business’ or ‘the rich’. And, even worse, it will guarantee a recession, making even more tax rises inevitable in the future.

It may not be quite so bad on the day. Both Sunak and Hunt are slick enough political operators to know that if they leak in advance that the fiscal statement will involve eye-watering tax rises – and if the rises are in the end simply very painful rather than completely brutal, many of us will be relieved.

Even so, there is little question that there will be some steep rises. It might be spun as paying for the fall-out of Liz Truss and Kwarsi Kwarteng’s mini-budget, but since most of those measures have been reversed that is not really true. In reality, it will be to pay for the energy bail-out, and for the Covid lockdown. Finding the £25 billion or so the Chancellor needs won’t be easy. Tweaking the rules on capital gains tax won’t work (people will simply postpone the gain) nor is there much scope to increase taxes on business after the rise in corporation tax (although a windfall levy on the banks seems likely even though it will damage the City’s competitiveness).

Instead, it will have to be one of the big three mainstream taxes. VAT can be ruled out because it would push inflation up. Income tax is hard to increase. That leaves NI, the tax that Sunak originally wanted to increase when he was working for Boris Johnson. The catch is, that will make a recession certain. The Bank of England will have to impose a steep rise in interest rates later this week. Real wages are falling sharply. With the rise in mortgage rates, house prices are likely to stall, or even fall outright, taking out one of the main engines of consumer demand. Companies are understandably in no mood to invest, and our main export markets in Europe are heading into a recession of their own. Add it all up and 2023 is likely to witness a severe drop in output. In reality, right now, the UK is trapped in a doom-loop of rising taxes, squeezed demand, necessitating steeper tax rises. It goes on and on without end. Perhaps Sunak and Hunt have thought of some clever way out of that – but there is very little sign of it so far.