Go for growth to avoid economic stagnation, experts urge

Going for growth by avoiding repeatedly hiking taxes to fund an ever-expanding British state is crucial to boosting the country’s economy, experts urged today.

Policymakers must escape the trap of choking economic growth by financing further government spending by repeatedly hiking taxes.

John O’Connell, chief executive of the TaxPayers’ Alliance, told City PM: “Ministers must refuse the tired argument that spending cannot be reined in and instead go for growth by backing business and cutting taxes.”

The warning comes as a fresh study published today reveals a persistently higher NHS bill and the enormous cost of transitioning to net zero will swell the size of the British state to historic proportions in the coming years.

The cost of caring for Britain’s ageing population will primarily drive a ramping up in government spending to the tune of £76bn a year by the end of this decade, taking the size of the state to the same level as Germany’s before the Covid-19 crisis, according to research by the Resolution Foundation (the Foundation), a think tank.

Ramping up funding to reach net zero targets will add £14bn each year to the government’s spending bill by 2030. 

The report comes as a raft of spending pledges set out at the last two budgets have already put the size of the state on course to reach its largest level since the 1970s.

The planned 1.25 percentage point national hike, on top of corporation and dividend tax hikes and the freezing of income tax thresholds will raise the tax burden to heaviest level since the 1950s.

Pursuing a strategy of achieving sustained economic growth to raise revenue for the Treasury is more desirable than balancing the public finances through further tax hikes, experts said.

“Avoiding a period of weak growth and relative economic decline is crucial,” the Foundation said, adding that a protracted period of sluggishness after the financial crisis has wiped £200bn a year off the government’s spending warchest.

Raising national insurance rates to stabilise the public finances will not work in the years ahead.

The health and social care levy, which will be carved out from the national insurance hike, “is small fry,” Dan Tomlinson, a senior economist at the Foundation, said, adding doing “more of the same” fiscal policies would be unproductive.