Will Jeremy Hunt’s U-turns deepen recession?

Just two weeks ago, Liz Truss told the Tory conference that her priority was ‘growth, growth and growth’. But how much of that can she expect now that her new Chancellor plans to jack up corporation tax from 19 per cent to 25 per cent as the economic headwinds strengthen? 

As she never tired of telling us during the leadership campaign, it’s an unusual thing to do at a time of threatened recession: no other G7 country plans to put up taxes in this way. Now that she has agreed to go along with the Sunak plan in the name of assuaging the markets, City forecasters are doing a double-take. Instead of that ‘growth, growth and growth’ we are set for recession – and one that they say will be deepened by the U-turns. Expect more of those this morning at Jeremy Hunt’s statement. Some verdicts:

Oxford Economics said on Friday: 

“Another tax U-turn (following backtracking on abolishing the 45p rate) will add to financial pressure on individuals. The rise in corporation tax will be borne by investors through lower dividends, consumers via higher prices, and workers through lower wages. It will also increase the cost of capital for firms, a negative for business investment. The tax burden is now headed to a 70-year high, a questionable development for an economy facing recession.

Martin Beck, chief economic adviser at the EY ITEM Club (on Radio 4 earlier):

“The U-turns mean that the tax burden will be higher than we were expecting. Raising taxes heading into a recession is not the economically orthodox thing to do. Typically, you’d expect fiscal policy to loosen in a recession: for the taxes to come down and public sending to rise. There is a risk that the government’s actions, the U-turns, make the recession a bit deeper than we were expecting.

Liz Truss’s absurd ‘growth, growth and growth’ theme, and Kwarteng’s absurd talk of 2.5 per cent annual growth, will ring in the ears of voters as they suffer the predicted long recession. The whole thing will be remembered as a deranged Tory joke. Truss and Kwarteng were quite right to aspire to growth, but to dangle it in front of a country on the way to recession was cruel and irresponsible. Those two should only ever have spoken about taking the edge off  a likely recession because that’s all that their limited tax cuts were likely to do.

The major forces shaping the UK economy are not homegrown. Every country in Europe is feeling the impact of high energy prices, high inflation, economic weakness in the US and eurozone and the global rise in interest rates. Yes, it was possible to overturn this with major stimulatory reforms. But shaving a penny off income tax was never going to change the narrative. It would have added 0.5 per cent to growth at best, never the 2.5 per cent figure spoken of.

So what can people expect now? There will be the best part of a year for the electorate to experience economic contraction – and, after that, several years to experience the higher prices and lower wages that are the results of corporation tax increases. Perhaps in his statement this morning, Mr Hunt can now explain to us why this is a price worth paying. Politics is always about trade-offs, and the Tories have some way to go before they level with the public about the trade-offs they are now making and the economic situation that we are really in.