John Redwood: My critique of the Chancellor’s Mais Lecture, and what the Government should do next

7 Mar

Sir John Redwood is MP for Wokingham, and is a former Secretary of State for Wales.

Amidst all the harrowing reports from Ukraine and the deaths and destruction wrought there by Russia, the Chancellor has sought to chart a course for the economy for the next couple of years.

In his Mais lecture he echoed his predecessor, Philip Hammond, in seeking a productivity breakthrough. He also reaffirmed the Maastricht rules approach to economic management, wanting tax rises to get the deficit down first. The Treasury should note that its role model the EU has abandoned these rules for the time being, and is pursuing monetary and fiscal expansion.

The lecture was wrong to deny that lower tax rates can bring in more revenues. The Republic of Ireland has been a shining example of this, boosting its per capita GDP far higher than ours or the lower level of the  EU by attracting huge investments through a 12.5 per cent Corporation Tax rate.

Their business taxes offer a higher percentage of total tax take than our higher rates. The Chancellor ignores the findings of Margaret Thatcher and Nigel Lawson who he praises. They produced a surge in revenues from higher paid people by major cuts in income tax rates.

The Government should take the cost of living crisis more seriously. In accordance with the Mais lecture, it needs to create the conditions for private sector investment in creating more better-paid jobs and in producing more of the goods and services we need at home.

Levelling up needs to be private sector led, and offer people the chance to set up and run their own businesses, be trained for better paid employment, and find ladders of opportunity in the areas attracting the projects and businesses.

The Government should not take the fast growth rate of 2021 for granted. It was a one-off based on removing Covid restrictions and on an unprecedented injection of money by the Treasury and the Bank of England. In the end, they overdid it in scale and duration, triggering a nasty inflation. The new investment has to take place against a less supportive public sector background.

The rise of prices well above wages will cut growth, as people spend more of their money on such basics as food and energy. That will leave them with less to spend on leisure and pleasure – on items that are nice to have. The huge rise in energy bills alongside tax rises including National Insurance will sap spending power further. The economy will slow. The lecture did not tell us how the extra private sector investment will be attracted in these conditions, particularly with the planned rises in Corporation Tax to come.

These troubles will be compounded by the Government’s import promotion policies, which are most pronounced in the Business and Agriculture departments. Business is busy allowing the rundown of big energy using manufacture like steel, ceramics, aluminium, and glass in the name of Net Zero.

The trouble is that we then import the products from abroad, meaning that more C02 is created in their production and transport to us. The Business Department is busy reducing our oil and gas output so that we need to import more energy. Again, this adds to our CO2 production worldwide.The Environment Department is developing big subsidy incentives to remove land from food production and to encourage older farmers to give up. That will make us more dependent on imported food.

So why does the Government not like products made or grown at home? Why doesn’t it want more home output to boost jobs, incomes and lifestyles? Any sensible programme of levelling up should be cutting taxes and making it easier for local businesses and farms to set up and grow.

This year, revenues have come in much higher than the Budget forecast, thanks to higher growth – and way higher than the £12 billion that the Government says it needs for a tax rise. The Treasury did not put up rates of tax, so revenue grew. During the next financial year, higher tax rates and frozen starting levels will hit taxpayers hard. Revenue is likely to underperform as growth stutters.

An energy shortage is a big part of the problem. The government should ease the shortages of gas, oil and electricity. They should invite in the oil and gas producers in the U.K. and help them increase production straight away from current fields. They should offer licences for new production from all those new and extended fields that have already been discovered. That’s more jobs, better paid jobs, and plenty of extra tax revenue. It is also less CO2 generated globally, as our own gas produces under half the CO2 of imported LNG gas. We will have much more productive industry if we have cheap or competitive energy.

The Government should work with the electricity industry to keep the lights on. We  will need more capacity than is planned to cover the electric revolution. We need more power for when the wind does not blow and the sun does not shine. We should abandon the current policy of putting in more and more interconnectors to allow us to import more from an energy short continent.  They should produce schemes to promote more home-grown food.