How the Chancellor can lay the foundations for an even stronger economy

In the forthcoming Budget, the Chancellor needs to reform the tax system to boost the economy. By cutting taxes and investing in infrastructure, the Government could facilitate a 'golden decade' for the British economy, writes John Baron MP. 

Despite the unexpected change at No 11, the Budget is still set to go ahead on 11^thMarch. Sensibly delayed until after our exit from the EU at the end of January, this will be the first opportunity since the General Election for the Government to set out its economic priorities. With a decisive majority at its back, the Government has a very free hand, and I hope it will capitalise on this situation by cutting taxes, addressing productivity, and investing in infrastructure. These will lay lasting foundations for an even stronger economy.

The challenge is to find the sweet spot on the 'Laffer Curve' which allows the optimum tax rate to maximise the tax take. This is not just a dry academic theory – there is abundant information underlining its real-world application. In 2017, HMRC collected almost 50% more tax money with a corporation tax rate of 19% than it did at a rate of 28% under the last Labour Government. Similarly, when the additional income tax rate was reduced from 50% to 45%, the amount raised from the richest taxpayers increased.

In the United States, President Trump's early tax cuts, unpopular with his critics who forecast a plunging dollar, a stalled economic recovery and a disaster with public services, have been a raging success. The cuts included cutting corporation tax from 35% to 21%, as well as a reduction in the top rate of income tax from 39% to 37% and raising its threshold to $500,000. Reductions in inheritance tax and expansions to child tax credit also formed part of the reforms.

Far from the critics' dire forecasts, the economy was buoyant and tax figures were extremely healthy. The tax collected in April 2018, the first month after the reductions took hold, was 12% higher than the previous year and broke all records, registering a surplus (after government spending) of $214 billion against the previous record of $180 billion in April 2001. Lower tax rates also encouraged large US companies to begin bringing home large profits generated abroad, again helping to top up federal coffers.

With the Laffer Curve in mind, the Chancellor should ignore the siren voices of the left to hike up taxes, but instead cut them to boost the economy and increase the sum of money available to fund improved public services – important as we seek to 'level up' across the country, particularly in those areas which have rarely, if ever, dared to vote Conservative.

Indeed, the Chancellor should go further and consider exempting small businesses from corporation tax altogether. Taxing these small businesses does not bring in much tax revenue compared to the very large companies, and it would give the SMEs which employ the vast majority of the workforce a real shot in the arm. Reducing the tax burden would allow SMEs to invest in and expand their own businesses, in turn boosting employment still further from the record levels we currently enjoy.

It is true that productivity is often raised as a challenge for the British Economy. Yet this can be misleading – in the first instance, our very low unemployment will make this problem appear worse, especially compared to other European countries. The Government's recent announcements on the new points-based immigration system, as well as being very welcome, may go a long way to improve our productivity figures. In an era of plentiful and essentially unlimited labour, such as we have seen in the UK for almost two decades, businesses have had a disincentive to invest in automation and to train and keep their staff.

With a potential narrowing of the labour pool when 'freedom of movement' formally ends, smart businesses will respond by retaining and training their staff to higher levels, as well as investigating what automation can offer. This should be seen for a win-win situation for both British business and British workers, and the Chancellor should put his full support behind these measures.

Moreover, the Chancellor should not forget this Government's 'One Nation' credentials and prioritise helping the lowest-paid. This can be best done by raising still further the tax-free Personal Allowance and by further rises to the National Living Wage. There may be complaints from businesses concerned about recruiting from a smaller labour pool and increased wage costs, but these should be more than balanced out by the cuts to corporation tax.

Our country is crying out for better infrastructure, including new roads, motorways, bridges and railways. For too long Conservatives have allowed ourselves to be boxed in by our rhetoric of reducing public spending. This made good sense in the immediate aftermath of the financial crisis and New Labour's mismanagement of the public finances, but this is now a decade in the past. As our economy continues to grow – faster than many European countries – we should not be afraid to take advantage of historically low interest rates, take on a manageable amount of debt and invest in our infrastructure.

These are a few clear measures the new Chancellor should strongly consider when putting together his Budget. This could be a 'golden decade' for the British economy. However, he would be well-advised to steer clear of the tax rises many of the economic commentariat, which invariably lean to the left, strongly advocate, and keep faith with the principle of the Laffer Curve and the new immigration system to boost our economy in complimentary ways. Improving our regional railways would also reap dividends – all aboard the Baron Line to success!