Which way will Boris turn the UK Economy in the post-Coronavirus World?

There is no doubt that the Coronavirus pandemic has put huge strain on public finances. Policies ranging from the Government’s furlough scheme to the construction of the Nightingale Hospitals have incurred huge financial costs to the Government.

Public debt has sky-rocketed, and the Government Debt Management Office  are working flat out to provide Government with the funds it requires.

The economic impact is likely to push the deficit as high as £260bn (BBC) but the question remains; which way will Boris turn? Will he pursue a policy of austerity; will he try to manage Government debt or will he have to resort to higher taxation to balance the books?

Throughout the General Election Mr. Johnson proclaimed his disdain for the term ‘Austerity’. He was attempting to distance himself from the policy pursued by the Tories in 2010. Regardless of its practicality, its popularity was of paramount concern for the Prime Minister. It is particularly unpopular in the cannonball constituencies that brought down the Red Wall in December, the areas where the constriction of public services was most felt.

For Johnson to pursue such a policy would be politically very damaging. There is also no indication that the Government wishes to pursue such a route.

Transport Secretary, Grant Shapps, has already pledged £2bn to be spent on British Transport to create ‘smoother and safer journeys’. This type of spending would simply be scrapped if austerity was being pursued by the Government.

Another option Mr Johnson holds is that of managing the national debt and ‘riding out the storm’.

If the Government wishes to avoid the policy of the oh-so dreaded Austerity and pursue its objectives, it will have to slowly deal and work with the accumulated debt. In 2019 the Tory manifesto pledged huge spending; 20,000 police officers, net zero carbon emissions by 2050, £14bn for schools, the list goes on…

The Government may wish to achieve these objectives and perhaps simultaneously avoid cutting spending that  may have a contractionary effect on the economy, which is imminently facing recession.

A possible solution may be to seek the promotion of economic growth in the long term, then pay off the deficit slowly without compromising on the objectives set out in the General Election. However, the Government must tread very carefully here. 

Maintaining, or even increasing such a high level of debt could have dire consequences for the country. We only  have to look at Greece to understand  the damaging effect that high levels of public debt  can have on the health of a country.

Some, particularly on the Left, suggest we should increase taxation to provide funds to bring down the debt levels. This could do more damage on the public finances than good.

A comparison that illustrates  this difference perfectly comes from the Labour Callaghan Government in 1976 when the tax rate for the top 1% of earners reached 83% on income. The richest 1% provided  11% of total Government income from tax revenue.

By comparison, in 2019 the top 1% of earners paid a tax rate of 45%. This led to the richest 1% providing 27% of income tax receipts .

Higher taxation has a contractionary effect on the economy as it leads to less revenue for the Government to address the financial issues. It can also  be hugely damaging, especially for the most disadvantaged in our society.

Higher taxation, or a tax on the rich is not the solution to balance the books.

The Left’s referral to the nostalgic, ‘Tax the rich’ slogan shows how they are blind to the complexities of economic policy.

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