Since his first appearance in ITR’s Global Tax 50, Boris Johnson has presided over an emergency response to COVID-19 with fiscal policy as a key lever in mitigating the worst of the economic fallout. A lot has changed for the Conservative leader who ran as an outsider politician in 2019.
The last time Johnson was featured in the Tax 50 he was triumphant after a landslide election victory. The Conservative Party won more than 50 Brexit-supporting Labour constituencies. Johnson had helped make “get Brexit done” inevitable.
Two years later, the UK is outside the EU and Johnson has become embroiled in scandals over claims he attended parties during lockdown. The Trade and Customs Agreement (TCA) is a reality, and the UK economy is wracked by the impact of COVID-19 and a supply chain crisis.
The Conservative leader looked like he might be on his way out of Downing Street, but then the Ukraine crisis struck. Johnson was quick to pledge support for Ukraine. He has imposed sanctions on Russian businesses and specific individuals. But his real legacy is still domestic.
What cannot be denied is that Johnson has changed the course of UK politics during his time as prime minister. He has presided over tax hikes and massive public spending. Fiscal policy looks very different to what it did a decade ago in the austerity years.
Many Leave campaigners wanted Brexit to be an opportunity to shrink the state and slash taxes to the bone in a bid to make the UK economy more dynamic and more competitive. Instead, the UK is heading for a very different economic model.
Low growth, high taxes
Despite his reputation for being a libertarian, Boris Johnson has backed massive state intervention in the economy and increased taxes to cover the long-term cost. The UK could afford this crisis spending thanks to cheap yields for raising debt on the capital markets.
The Johnson government quickly set itself apart from the short-lived May government. Strict austerity was no longer the name of the game, although Johnson picked up where Theresa May left off. His government has not reversed the years of public spending cuts.
The Johnson government made it clear that it was abandoning Philip Hammond’s public spending limits and adopting a more expansionary spending plan. Though this will mean extra tax revenue has to be found from somewhere, even if it’s just to finance a budget deficit rather than create a surplus.
This is why Johnson announced his government was shelving the plan to cut corporation tax from 19% to 17% in 2020. Yet he went further in 2021 with a corporate tax increase to 24%. His government has also increased national insurance rates and considered raising capital gains tax.
The most pro-business tax policy the Johnson government put into action was the 130% ‘super-deduction’ for capital investment. However, this is a temporary measure implemented to bolster economic growth as the pandemic is contained.
Not everyone is convinced that this is enough. Tony Danker, director general of the Confederation of British Industry (CBI), gave a speech on February 3 criticising the UK’s economic strategy. He claimed the country was moving into a “vicious cycle” of high taxes and low growth.
“The super-deduction was a super-exception to normal incremental thinking. It was the boldness we need. Now, the 2023 end date is just too soon for most investment cycles,” Danker told the audience at CBI head office.
“So not only does it need extending; it needs to represent a totally new way of thinking about business investment,” he stressed.
The CBI is calling for a permanent 100% investment deduction for capital spending to boost investment. This would apply from March 2023, when the Treasury’s ‘super-deduction’ ends. Once upon a time, Conservative governments would have backed such a policy.
It may be too costly to offer a permanent investment deduction, but Johnson needs to win over business leaders. He has to convince Conservative MPs to stay on his side, while he rebuilds his support among the public.
Leadership change?
By March 2023, the Conservatives may be thinking about the next general election. The UK has to hold an election before the end of 2024. This is why there is such urgency over Johnson’s position, and who, if anyone, could replace him.
The Conservative Party may have a leadership election in 2022 unless Johnson can turn around his approval ratings ahead of the May local elections. He still commands enough loyalty among Conservative MPs to hold on, but this could change very quickly in the near future.
However, observers should be careful about making predictions of Johnson’s political downfall. Theresa May outlasted all such predictions without a majority, relying on the Democratic Unionist Party (DUP), even after losing countless votes in Parliament.
By contrast, Johnson presided over the revival of the Conservative national vote in 2019. The party, which had no won a large majority since 1992, seized dozens of Labour seats in Northern English towns. This achievement means Johnson may be able to hold-off his opponents for a while.
Whether or not he faces a leadership election sooner or later, Boris Johnson’s legacy in UK politics will play out for many years to come.
