Bill Jamieson: Why a tax hike would stall return of White Van Man

We all have our personal measures of economic recovery. A popular sport in previous downturns was to count the number of construction cranes sprouting on the office skyline. For others it was the disappearing spaces in town centre car parks.

The growing number of commercial vehicles hints at progress. Picture: Getty/iStockphoto

Today I pitch my own measure – and it suggests we may be closer to a V-shaped recovery than widely thought.

Over the past two weeks there has been a notable rise in the number of commercial vehicles on the roads – white vans in particular.

Just a few weeks ago my drive to the local hospital would take a fraction of the time it once took as road traffic fell away dramatically: no bottlenecks, no queues at lights, no tailbacks.

Today White Van Man looks to be back in large numbers.

Now, it could be that white vans have become the household “must have” for young families. All manner of items can be thrown into a (ahem) “recreational vehicle” for a family outings: camping equipment, pet baskets, clothes, seaside miscellany – and of course, all manner of garden tools.

Or is could be that many furloughed workers are now busy moonlighting – earning extra income where and when they can to augment reduced incomes. And are there not many home-bound office workers who may have taken the opportunity to earn extra income by copy-editing, research and a little extra admin and secretarial duties?

There is no mind more resourceful and inventive than one in search of an extra earned penny. But even allowing for an expansion of this casual “portfolio working”, the re-emergence of White Van Man suggests we may be closer to a long climb out of recession than official data is capturing. And pointers from semi-official data would seem to bear this out:

◆ A recent survey of manufacturing industry professionals found that 60 per cent expect the sector to recover to business as normal by mid-2021;

◆ The latest Purchasing Managers Index for the construction sector rose to a 23-month high of 55.3 in June – comfortably above the 50.0 level that indicates flat activity;

◆ New car sales in June, while still down 34.9 per cent on a year ago, have picked up from 20,247 in May to 145,377. Sales of new vans in the UK appear to be approaching normal levels, according to new figures released last week. Data from the Society of Motor Manufacturers and Traders shows more than 30,000 new vans were registered last month – only 25 per cent fewer than were registered in the same month of 2019.

We may not yet be in recovery, but rather the start of a long convalescence, a period that always takes longer than we allow for. Months after the worst peak of an illness we have periods of lassitude and frailty, and this I suspect will be true of this economic recovery, north and south of the border.

That is why I am wary of the suggestions in recent days of a black cloud budget of tax rises and spending cuts looming in October. Chancellor Rishi Sunak has an epic battle ahead to bring some semblance of order to the public finances. But are higher taxes the right way forward?

Paul Johnson of the Institute of Fiscal Studies warned last week of a “financial coronavirus reckoning”. The additional £30 billion of spending measures just announced by the Chancellor – this on top of emergency help already announced of £190bn – is set to push the budget deficit towards £350bn this fiscal year – the highest level of government borrowing in UK history outside of two world wars. On top of this a further £122bn has been injected into the economy in loans and deferred taxes since the start of the crisis.

And Scotland starts from an even weaker position than that of the rest of the UK. The condition we were in before Covid-19 struck – “status quo ante” – was far from buoyant.

As economist Professor John McLaren pointed out last month, Scottish growth slowed noticeably post the 2008-09 recession, and even after adjusting for population change, Scotland has grown more slowly than the UK. Furthermore, this slower relative growth has worsened post 2008.

Hospitality sector accommodation and catering recorded no growth in output over the past two decades. By contrast, at the UK level the sector grew by around 35 per cent. The health and social work sector in Scotland has consistently grown more slowly than is seen for the UK, leading to an increase in output (for example, the number of operations) of less than half the 60 per cent experienced at the UK level.

“In the past,” Professor McLaren comments, “such underperformance idiosyncrasies may have seemed academic to many people. However, now that the Scottish Budget is highly dependent on the Scottish growth rate, via income tax, then such failures have tangible consequences”.

The temporary VAT cut for the hospitality sector, announced by the Chancellor, in addition to the Jobs Retention Bonus, will be a big boost for Scottish businesses: tourism represents 5 per cent of GDP and 8.5 per cent of employment.

And the increase in starting threshold for Land and Building Transactions Tax from £145,000 to £250,000 together with an additional £50 million for the First Home Fund will help invigorate the housing market.

But what of the longer term? What concerns me is the predilection of the Scottish Government to reach for higher taxes as a means of tackling, not just a spiralling deficit but of “levelling up” the economy.

Faced with the prospect of higher tax – whether on firms or on individuals through a wealth tax – businesses large and small are likely to recoil from expansion or future investment.

For a pro-growth strategy to succeed, it must rule out tax rises and enable a lift in business revenues and personal tax revenues from recovering employment to restore government coffers over time and the debt ratio to come down steadily. Low interest rates and yields on bonds gives the Chancellor an opportunity to borrow at a cost markedly lower than that which has daunted a long line of his predecessors.

By contrast, there is a real risk that tax rises would work to crush a nascent recovery – and for that reason alone they should be avoided this autumn.