Tory Keynesianism? Boris Johnson's Postponed Tax Cuts Signal Shift In Conservative Economic Agenda

Boris Johnson used his speech at the Confederation of British Industry (CBI) conference on Monday to inform business leaders that a previously proposed cut in corporation tax will be dropped, instead instructing business leaders to accept a £6 billion injection into public utilities. 

Shifting away from his previous proposal in April to decrease corporation tax from 19% to 17%, Johnson asked for businesses to appreciate the governments policy reversal on the basis that it will improve and expand the reach of the public sector, which he describes as the "priorities" of the British people.

"I hope you won’t mind if I also announce today that we are postponing further cuts in corporation tax and before you storm the stage and protest, let me remind you that this saves £6 billion that we can put into the priorities of the British people, including the NHS," the Prime Minister said.

“I hope you understand that it is the fiscally sensible thing to do”, he emphasised.

​Despite the apparent climb down, Johnson attempted to placate any disappointment among business leaders by warning them of the alternative possibility of a Labour government under Jeremy Corbyn "who would whack it straight back up to the highest levels in Europe."

This is in spite of the fact that Labour's official policy is to raise corporate tax to 29%, which is still below other EU countries such as France and Portugal.

Johnson also proposed tax cuts for small businesses and raising the employment allowance. 

The announcement comes as the prime minister attempts to discredit accusations, which have constantly overshadowed Conservative policy, that the party represents the interests of private corporations and prioritises tax breaks for the wealthy over investment in public services.

Geraint Johnes, professor of economics at the Lancaster University Management School said on Monday that the announcement from Johnson reveals "disturbingly muddled thinking at the heart of government."

"Up to now, the government has argued that cuts in this particular tax rate are self-financing, because lower tax rates attract more business activity into the UK," he said.

"During the election period, with the focus on how promises are to be funded, some rather suspect spreadsheet arithmetic has been used to generate apparent funding for public services."

Professor Johnes explained:

"An increase in spend on public services is desperately needed after a decade of austerity" but "fiscal rules" would make it difficult for the government to borrow in order to fund current expenditures.

A tax change without taking into account the behavioural implications "risks being grossly misleading," he claimed.

"Either the prime minister was ignorant of the economic effects of a corporation tax cut in the past, or he is ignorant of them now, or both. The result is a promise without substance."

Labour has attempted to capitalise on the portrayal of the Tories as the party of the rich, offering significant injections of public investment and the nationalisation of key industry to expand and improve railways, healthcare, education, and more recently - broadband, for the public.

The leader of the Labour Party, Jeremy Corbyn tried to neutralise any fears that he is "anti-business" during his speech.

“It’s sometimes claimed that I’m anti-business” he said. “That is complete nonsense. It’s not anti-business to be against poverty pay. It’s not anti-business to say the largest corporations should pay their taxes just as smaller companies do. It’s not anti-business to want prosperity in every part of our country and not only the City of London."

​He announced that businesses would benefit from his and Shadow Chancellor John McDonnell's plans for state improvements with a more educated workforce, reliable transport links, and access to the EU's Customs Union and Single Market.

The announcements made by both leaders come as public sentiment is seemingly shifting towards support for state intervention, with a YouGov poll in November showing that public opinion is significantly in favour of public ownership of services, many of which are currently partly or entirely owned and maintained by the private sector. 

​The poll also revealed that only 2% of people responded yes when asked if the government should “keep things the way they are” regarding the economy. While 60% said that they would be in favour of either moderate or radical change.

The spending race between the two contenders for government comes as the Resolution Foundation think-tank released a report in November showing that the spending aims under both parties to end austerity and expand state investment could see spending rise to more than 42% of GDP, a level not seen since the 1970s.

Insincere Electioneering?

What makes the policy change significant is that it doesn't just mark an attempt to negate Labour attacks, but it also demonstrates a radical shift of ideological direction of the Conservative Party's economic agenda.

Sebastian Payne from the Financial Times commented that the Tories have gone from the party of "lower, not low, tax" in response to the "radical" spending proposals of the Labour Party.

​A difficulty which the Conservative's may face in re-branding itself as the party of investment however is their own legacy in government.

Exemplified in the questionable choice of an election slogan "Britain Deserves Better", providing easy ammunition to critics who only have to identify that it's the Tory's who have been responsible for the implementation of drastic cuts to state spending over the past nine years.

The shift began when Chancellor Sajid Javid declared an "end" to austerity in September, a move announced concurrently with the Prime Ministers pledge to increase police numbers by 20,000.

The recent move to increase spending may be contradictory to the post-Brexit vision promoted by Tory front bench MP's.

New Leader of the House of Commons Jacob Rees-Mogg said in 2017 that Britain's economic prospects outside of the EU would be boosted greatly by a reduction in regulation, taxes, and increased "free trade."

“The window of post-Brexit freedom will remain firmly shut to those forecasters who subscribe to the modelling approach adopted by HM Treasury, which has a neo-protectionist approach and an inbuilt bias towards a pessimistic assessment of Brexit”.

Traditionally, the Conservative Party has advocated a reduction in state involvement in the economy to encourage inter-business competition and market activity, while Labour has historically argued the necessity for state control and investment to generate demand - consistent with the Keynesian economic model which dominated Europe and much of the world until the 1970s.

Legitimate proposals or tactical politics, the rhetoric from the PM marks a stark change from just three years ago, when former Chancellor George Osborne proposed to reduce corporate tax to 17% by 2020, demonstrating that a remarkable shift in a decades-long held economic agenda can occur in an extremely short period of time.