Where did this government find a forest of magic money trees?

Right-wing politicians have been just as bad as the left in resorting to magic to run the economy

The fruit to be picked from magic money trees differs depending on party ideology (AP)

Very few politicians have made themselves popular by promising to raise taxes, even in a good cause. Rishi Sunak’s NHS and social care levy on national insurance is the latest example of an unpopular tax attacked by political supporters and opponents alike. It could have been better designed to avoid hitting younger, low-paid workers, though I very much doubt that would have enhanced its popularity.

The uncomfortable truth is that most of us want better government services but believe other people should pay for them. Conservatives say they want less tax without cutting services; socialists want better services for the many, paid for by taxes only on the few. (One of the rare popular pleas for higher taxes was the late Paddy Ashdown’s promise of “1p in the pound for education” which was widely interpreted as paying a little extra tax for a lot of education.)

This conundrum is being resolved by more magical thinking on both sides of the political spectrum. Current tax policy owes more to Harry Potter and Bilbo Baggins than the Institute of Fiscal Studies and other experts. Last week’s windfall tax was a classic: so popular it produced an all-party consensus; so limited it financed less than a third of the associated spending commitment; so complex its (probably negative) eventual impact on energy investment will be lost in the details.

The fruit to be picked from magic money trees differs depending on party ideology.

On the left, taxing companies is a favourite. But the cost of significantly higher corporation tax is passed on in higher prices, lower wages, lower dividends and reduced investment. The same is true of a “financial transactions tax”. Assuming electrons can be made to hang around long enough for the Inland Revenue to catch them, the impact is simply an addition to the costs to companies of moving money around.  Legal entities, unlike people, can’t feel pain and can’t protest in the streets or at the ballot box.

Then there is dealing with tax avoidance.  Few “progressive” manifestos are complete without promises of a crackdown. But every budget has a complicated “anti-avoidance” measure dreamt up by understaffed, overworked tax officials in their forever war against highly paid, ultra-clever tax accountants. If there are big loopholes you would imagine that they would have been found by now. There are numerous dodges via tax havens and painfully slow progress is being made multilaterally to deal with them. But unless we have a world government there is no easy way of getting our hands on this hidden loot.

The Jeremy Corbyns of this world have rightly had a bad press for resorting to magic as a fiscal tool, but right-wing politicians have been just as bad. A favourite dodge is to promise tax cuts financed by the supposedly vast harvest waiting to be picked from the magic trees in the form of “savings” from “reducing waste” and “increased efficiency”.

I am always baffled by the idea that civil servants are wilfully suppressing efficiency and indulging in wasteful practices until a suitably “small state” minister comes along to shake the fruit off the tree. And since Conservative ministers have been shaking the tree for over a decade it is difficult to believe much fruit is left. Having been involved for five years carrying out Treasury instructions to “cut waste” and “raise efficiency” I soon learnt that these were euphemisms for cutting services.

Another right-wing magic trick is the “Laffer curve”: a bit of pseudo-economics which purports to demonstrate that lower tax rates raise more revenue. It is true that in some very special circumstances, where tax rates have been penal, a tax cut has produced higher tax yields. But as a general principle it isn’t a great idea. President Reagan was allegedly sold on it when Professor Laffer drew him the infamous curve on a table napkin. The result was the mother of all budget deficits and increased government borrowing and debt.

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The balance between receipts from the latest windfall tax and the spending it is supposed to pay for will be the same. In fact, over two-thirds of the emergency Budget is financed by more borrowing. That doesn’t matter too much as long as the economy is growing faster than the debt accumulates.

And so we come to the final magic trick. All governments supposedly “create growth”. Wilson, Thatcher, Brown and Osborne all had a magical formula for boosting growth and will claim they did: for a while. But the underlying trend of British growth has been largely unchanged for well over a century. The troughs balance out the peaks.

It is all very well to criticise the magicians. But what would I do if magic money trees are not the answer? I want to see greatly improved public services and more generous benefits. I know they must be paid for and would therefore apply higher levels of income tax, VAT and property tax, applied more progressively.  But I can only say such things from the safety of retirement.

Sir Vince Cable is the former leader of the Liberal Democrats. His podcast ‘Cable Comments’ is available here