Nadhim Zahawi: Will the new Chancellor change the direction of the economy? † Economic policy

Should he stay on the job longer than some political commentators expect, Nadhim Zahawi will face a balancing act as chancellor. He must walk the line between doing what it takes to prevent the political implosion of Boris Johnson’s government and confronting the worst succession of economic shocks to hit Britain since at least the 1970s.

As the fourth Conservative chancellor in as many years, sacked after Rishi Sunak resigned with a caustic critique of Johnson’s diabolical stance on taxes and spending, Zahawi is expected to come under heavy pressure from the prime minister to cut taxes. to revive the government. economy.

Zahawi is the second richest MP after his predecessor, with an even more complicated business hinterland than Sunak. Amid the cost of living crisis, opponents are likely to jump on his past as an oil industry executive who made millions from fossil fuels while serving as an MP, as well as past ties to former Tory MP Jeffrey Archer, and bill taxpayers for the electricity for his stables.

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The new chancellor has the unenviable job of steering the economy out of a recession and an ongoing shock in the cost of living. Inflation is at its highest point since 1982 and is expected to reach 11% in October, while the economy is expected to plunge to the bottom of the global growth charts next year.

High on the agenda are tackling the cost of living, emergencies, strikes and wage disputes in the public sector, Brexit and supply chain disruptions, staff shortages, rising interest rates and deep regional divisions – all while taking into account one of the largest budget deficits since 1947.

So far, Zahawi has called for every option to be considered, arguing that he wants to be an “evidence-based chancellor” who will curb inflation and get the economy growing again. “There is nothing off the table,” he said during Wednesday morning’s broadcast.

More and more expectations are being raised for a package of tax giveaways. If Sunak meets the Prime Minister’s demands, the logic goes, Zahawi will yield. However, such generosity can cost the treasury billions — and can have questionable results.

Possible options include lowering VAT, a policy pushed by Steve Barclay in recent weeks and now further elevated to health minister within Johnson’s inner circle. A cut in the current nominal rate from 20% to 17.5% would cost the government around £18bn.

Sunak argued against this, arguing that it would benefit wealthier households the most as they threw gasoline on the inflationary fire.

Another option would be to reverse Sunak’s plan to raise corporate taxes from 19% to 25% from April. On Zahawi’s first morning on the job, he spoke not only about fiscal discipline, but also the importance of a competitive tax rate, language that could be interpreted as being in favor of scrapping Sunak’s plan.

“I know that boards around the world, when they make investment decisions, they are long-term, and the only tax they can compare globally is the corporate tax,” he told Sky News.

Sunak favored higher nominal rates, offset by tax cuts to encourage business investment. He was preparing a replacement for his “super deduction” scheme, which should be introduced from April to absorb the rise in general interest rates, with a possible price tag of up to £11bn. However, scrapping the nominal interest rate hike would cost £17 billion a year.

Economists have pointed out that under George Osborne’s cut in nominal interest rates from 28% to 19%, corporate investment has lagged behind OECD countries, costing the treasury billions and filling shareholders’ wallets.

In recent months, business leaders agreed that a change of course was warranted to boost Britain’s poor record on investment and productivity. Despite supporting Sunak’s plan, they are unlikely to complain about a cut in headline interest rates.

Finally, there will be questions about the income tax, which is the third of the three major income-boosting taxes for the treasury alongside VAT and corporate taxes. Sunak planned to lower the base rate from 20p to 19p by 2024, although he was under pressure to bring it forward.

The tax burden is expected to rise to its highest level since Clement Attlee was Prime Minister in the 1940s. Many economists say this is the inevitable result of Brexit and a Covid-weakened economy not generating enough tax revenue to cover rising government spending on an aging population, as well as leveling out. Zahawi, if he keeps his job, will face the challenge of cutting taxes against such a backdrop.

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