Week in Business: Will more defence spending mean higher taxes?
Cutting the international aid budget to boost defence spending – sounds like a fair exchange in a time of war and hazard – but there’s more to this announcement than meets the eye.
The Prime Minister was deadly serious when he stood up in the Commons this week to declare that the country faces a generational challenge that requires a generational response.
He went on to call for “a whole society effort that will reach into the lives, the industries and the homes of the British people.”
It wasn’t quite up there with “we will fight them on the beaches” but he was certainly reaching for some Churchillian rhetoric.
Unfortunately, behind the stirring soundbites lies a fairly basic piece of Westminster spin.
The PM would have us believe that he’s going to spend an extra £13bn on defence – that’s his number and he’s sticking to it – but in fact when you strip away the extra spending that was already on the cards the new money amounts to £6bn – which for context is about £2bn less than Ed Miliband’s been given to spend on his pretend energy company.
The £6bn in question will come from the foreign aid budget, something that has triggered howls of outrage from what we call the international development community but the PM is absolutely right that these are serious times and priorities change.
So, he’s moving defence spending to 2.5 per cent of GDP – but he wants to hit 3 per cent within a decade – something that nobody deems possible without either drastic spending cuts elsewhere or fresh tax rises.
Governments tend to look at borrowing for this kind of thing but economists have warned that any bid to borrow for increased defence spending would add to concerns about debt and lead to another spike in gilt yields – something the government, and the country, can ill afford.
Of course, we wouldn’t be in this straight-jacketed debate about spending cuts versus tax rises if the economy was firing on all cylinders.
I’ve said before that the government’s pro-growth ideas are all long term bets – infrastructure, nuclear power, new towns – and who knows, it’s possible that by the end of the decade – when the UK aims to hit 3 per cent of GDP on defence spending – we’ll have rediscovered the joys of 2, 2.5 or even 3 per cent growth – I mean, other countries are managing it.
But until then, we’re stuck with what we’ve got; a low growth economy committed to high public expenditure.
And for reasons I’ve explored here every week, the government is squarely responsible for the current state of affairs.
This week the British Chambers of Commerce warned that employers are sitting on a powder keg of costs ahead of April’s rise in employment taxes and minimum wage increases – to say nothing of the burden of new employment legislation set to add insult to injury.
More than 80 per cent of businesses from across the country surveyed by the business group said that the Budget’s tax raid will have an impact on their firm – and not a good one.
Nearly 60 per cent said it would impact recruitment plans while more than half said it would prompt price rises.
More than a third said they would cut back investment as a result of the new burdens.
And if we zoom in on a particular sector – retail – we can see what this means in reality, with the British Retail Consortium warning this week that 160,000 jobs in the sector are now at risk – not least part time jobs on which so many people rely.
So, an economy at risk of stagnation, inflation lingering, confidence shot and major new demands on public expenditure – that’s the context in which the Chancellor will deliver her Spring Statement in a few weeks.
Little wonder we’re hearing more and more about the likelihood of further tax rises, with former Bank of England Mervyn King becoming the last big beast to raise the prospect.
He told Sophy Ridge on Sky News last night that the outlook obviously necessitates further tax rises and that income tax is where the Chancellor should look.
I’m afraid the truth is that it’s hard to imagine any Chancellor or any government actually cutting taxes in the years ahead; the Tories – supposedly the party of low tax if they’re anything at all – presided over an ever increasing tax burden and expansion of the state – and the only difference with a Labour government is that they don’t pretend to be uncomfortable with that.
The tragedy is that this country is bursting with talent, ideas, ambitious entrepreneurs and dedicated early-stage investors – I meet them all the time – but there’s a disconnect between that energy, that potential, and the kind of economy we’ve grown used to – one that’s highly taxed, over burdened with regulation and constantly squeezed to fund the expectations we have of the state.
This is the debate that matters in the years ahead, every bit as much as the debate we’re now having on defence and security.