The former chief economist of the Bank of England has warned against cutting taxes, saying that it risks making a bad situation worse.
Andy Haldane made the comments to journalist Robert Peston as they discussed the problems facing the UK economy on the Rest is Money podcast.
Mr Haldane was prompted to address the issues of tax cuts when the conversation turned to former Prime Minister Liz Truss’s vision for growth in Britain.
Ms Truss argued that a significant cut to taxes would result in further revenues for the Government as people would have more of their own money to pump back into the economy.
But Mr Haldane said that this only works in certain scenarios and that in the present one it would “make a bad situation worse” despite the possibility of an initial “sugar rush of increased spending”.
Mr Haldane said: “Wouldn’t it be lovely if, by cutting taxes, we could raise more revenues rather than less? Wouldn’t that be lovely? Everyone would be going gangbusters for tax cuts, would they not?”
Mr Peston replied: “As you say, around the world we’d have five percent tax rates and public services would be gleaming in the best we could possibly have the world.”
Mr Haldane then argued that the reason people think that sweeping tax cuts work is because it has in past circumstances that are not comparible to today.
“In the old days, which you’ll remember, this used to go by the name of the laugher curve. Of course you know, back at the time of Ronald Reagan … the notion was that there were times that by cutting taxes you stimulated more spending and more working and therefore more tax revenues.
“I think when tax rates were at the levels they were in the 70s and early 80s, there is possibly a case for that If you’re taking them down from rates. The marginal rates of income tax in the UK then were in the 90s [in percentage terms].
“So the thought that at those sorts of levels that you might draw a few people back into the net and squeeze out a few more pounds, I think is reasonable.”
Mr Peston said: “So when you have huge marginal taxes, marginal tax rates are incredibly high. If you cut them, you might encourage a bit more activity and that might, on the margin, generate a bit more tax.”
Mr Haldane replied: “That’s right. Now, that’s not where we are, it’s not where any else is either and, as best we can tell, the sort of tax rates that we are, we have now in the UK, indeed elsewhere.
“That is not the way the story works, so the incentive effects are very small, the avoidance effects are very modest and in actual fact that’s a recipe for for cutting revenues rather than raising them and so if you cut tax now and you cut revenues and you’ve got a crisis in public services not enough money for schools and hospitals you just make the problem worse, make a bad situation worse and you might get some sugar rush of increased spending.
“But is the sugar rush of demand what we need? No, the UK’s problem has been too much demand. That’s why inflation’s picked up relative to its supply side capacity.”
