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The Guardian view on Boris Johnson’s trilemma: deficits, taxes or inflation? | Economic policy

The Guardian view on Boris Johnson’s trilemma: deficits, taxes or inflation? | Economic policy


Over the past four decades, Britain has been beset by slowing productivity, soaring inequality, an environmental emergency and repeated financial crises. Coronavirus has thrown into sharp relief existing disparities, and also created new ones. Those in power seem unwilling to deal with a broken system. They shy away from developing the ideas needed for reform. What’s offered is performance rather than policy. In this regard, Boris Johnson’s government excelled: it mouthed the words but didn’t mean any of them.

That is why the leaks suggesting that the chancellor, Rishi Sunak, is contemplating a radical and redistributive budget – with taxes raised on the wealthy, big businesses, pensions and motorists – have to be taken with a pound of salt. These proposals would be the right ones to enact and, if Mr Sunak were to implement them, he would be stealing shamelessly from Labour’s 2019 manifesto. The chancellor defied his reputation as a state-shrinking Brexiter and splashed out during the pandemic, saving companies from bankruptcy and many people’s jobs – including his own.

All this could be the start of Mr Johnson rebalancing the economy and reconstructing a society that will work for all. Yet, it is far from clear that his Conservative party can deliver the necessary changes. These are Tory MPs for whom a “small state, low tax” policy has been an article of Thatcherite faith. Mr Johnson’s defiance of party orthodoxy can be explained by his electoral base.

The Tories’ election triumph last December was delivered largely with the votes of poorer, former Labour supporters in the Midlands and north of England. Since then, the pandemic has dramatically changed political priorities and taken the national debt to more than 100% of GDP – the highest it has been since 1961. For Mr Johnson to retain his electorally successful coalition, he needs to deliver for these former “red wall” voters. They want to see the British economy “levelled up”, as the prime minister promised, by spending heavily on infrastructure and public services like the NHS.

This electoral prize must be balanced by the Tories’ traditional instincts, embodied by the Conservative manifesto “triple tax lock” pledge – that is, no increases in income tax, national insurance or VAT. Back-door tax increases, such as ending relief on main house sales, would spark a backlash among Tory voters. For the Treasury, big increases in public-service spending require additional revenue raising. Higher taxation would be politically popular if imposed simply on the top 1%, the very richest in society, and businesses. No amount of higher tax on these groups will make a substantial difference to the public finances.

The ability of the government to run deficits is not limited to times of crisis. The irony is that the real limits faced by the government before the pandemic were less constraining than after coronavirus reduced the nation’s productive capacity. Perhaps the most politically expedient way to reduce debt, economists suggest, would be to keep interest rates at rock bottom while permitting inflation to erode the debt away. Mr Johnson might enjoy proving his critics wrong and turn on the spending taps.

Inflation is sparked when nominal spending outpaces the real capacity of the economy to produce goods and services. But ongoing price rises require companies and workers to fight over increases in their nominal incomes. Such a strategy would sharpen the conflictual nature of the capitalist system. It would be a big gamble, threatening a run on the pound when a no-deal Brexit looms. But the race to debase currencies, say observers, has already gone global.

Mr Johnson has backed himself into a corner: either he lets down “red wall” voters and snubs the Tory faithful, or, to keep his coalition together, he navigates a risky course into the unknown. To govern is to choose and how Mr Johnson negotiates this trilemma will define his premiership.


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