Get out of your groupthink Rishi Sunak … you CAN cut taxes

CRIPPLING rail strikes. British Airways staff voting for a summer walkout. Teachers demanding higher pay. A cost-of-living crisis being top of voters’ minds in Thursday’s by-elections.

After these events of the past week, the Prime Minister needs urgently to unveil a clear economic plan and vision.

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But right now he does not have one — and it shows.

Boris Johnson has to explain there is no easy way to get inflation back under control and that the next year or two will be tough.

But at the same time, he has to prove he understands peoples’ concerns and is going to help.

While eight million vulnerable households are set to receive £1,200 in government help this year to pay their bills, it is the squeezed middle who are also in desperate need of assistance.

Thus, tax cuts are needed.

His economic vision must help workers and be pro-business, too, built on more investment, smarter regulation, low inflation and lower taxes.

It is only then, with stronger growth, that the economy will be able to deliver higher productivity and wages.

Currently, we face the twin challenge of rampant inflation and economic slowdown.

Consumer price inflation is 9.1 per cent. It could hit 11 per cent this autumn as fuel prices rise again.

Retail price inflation, which determines rail fares and interest payments on student loans, is even higher.

Rising inflation has been driven partly by global factors linked to the pandemic and the war in Ukraine.

So high food and fuel prices could be with us for some time.

But a big factor feeding inflation has been lax monetary policy.

Last year the Bank of England was crazily printing money, feeding inflation.

Now it is squeezing the economy through higher interest rates.

So where do wages fit in? Earnings are rising by 4.2 per cent. They are up 8.2 per cent in the private sector and 1.6 per cent in the public sector.

No wonder many want a pay rise.

But are strikes justified? Certainly not when they cause such widespread disruption as we saw on the railways this week.

While people will naturally seek higher wages, the outcome depends on market conditions and the ability of firms or the Government to pay.

The big challenge for Boris Johnson is that he cannot afford for the strikers to win.

If they do, it may encourage more widespread industrial action.

Also, as inflation takes hold, the worry is that we see a self-feeding spiral.

Firms pass on higher costs. Prices rise. Workers seek higher pay. And in turn, costs rise further

In the mid-Seventies, Labour PM Harold Wilson tried to get people to understand the inflation challenge.

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A 16-page pamphlet was posted to every household to deliver a clear message: “One man’s pay rise is not only another man’s price rise: It might also cost him his own job — or his neighbour’s job.”

It didn’t work but it was an important message to convey and is still relevant today.

Importantly, the Chancellor Rishi Sunak has already unveiled a succession of financial packages that are feeding through.

This includes an increase in National Insurance allowances next month.

These don’t ease all the pain but lessen the case for aggressive wage hikes.

Some unions claim inflation is caused by greedy firms pushing up profits. It hasn’t been.

But many firms have passed on higher costs. And excess profits in the energy sector has led to a windfall tax.

In fact, the share of wages has risen in recent years

The Office for National Statistics shows the share of the economy’s income that goes to wages has risen for each of the five years since 2016 to reach 60 per cent. That’s good.

But almost half of people in employment work in low-wage, low-productive service industries such as accommodation, retail and food services.

Rising inflation gives the Government some scope to give modest public sector pay increases.

It is hard to see large pay awards unless there is public sector reform — and that is unlikely.

So what else can Rishi Sunak do?

He has already announced timely, temporary and targeted help to those most in need, which I called for.

But he still needs to break out of the “groupthink” at the Treasury where they resist tax cuts.

More can be done to reduce taxes on fuel and energy.

This includes cutting VAT, lower fuel duties and even suspending the environmental levy on energy bills.

The Chancellor also needs to help the squeezed middle and cut income tax in the autumn Budget to help boost demand.

And, to help firms, next spring’s planned hike in corporation tax could be halted.

It is now time for decisive policy action. The Bank of England has been terrible in controlling inflation. It needs to get a grip.

But consumer confidence is at a record low and a recession is likely.

So it is imperative the Prime Minister unveils his economic vision and the Chancellor cuts taxes.

• Dr Gerard Lyons is one of the UK’s leading economists and is chief economic strategist at Netwealth. He was Boris Johnson’s chief economic adviser during his time as London Mayor.

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