Britain risks deepening its economic malaise by raising taxes again, a former adviser to three US presidents has warned, as pressure mounts on Andy Burnham and Chancellor John Healey ahead of next month’s Budget.
Arthur Laffer, the influential American economist best known for his theory that excessive taxation can ultimately reduce government revenues, said the UK was caught in a “death spiral” of weak growth and rising fiscal pressure.
Mr Laffer, who has advised Ronald Reagan, Bill Clinton and Donald Trump, is due to visit London this week and urged the Government against using its first Budget to impose another round of tax increases.
“I have never heard of an economy being taxed into prosperity. What’s happening is, Britain is taxing itself into death,” he told The Telegraph.
“Your problem is not too little revenue. Your problem is too little growth, too little prosperity.”
The intervention comes as Mr Burnham and Mr Healey prepare for an October 28 Budget overshadowed by concerns about weak economic growth, elevated borrowing costs and the deteriorating state of the public finances.
Neither the Prime Minister nor the Chancellor has ruled out tax rises, prompting warnings from business groups and investors that another fiscal squeeze could further undermine confidence.
Mr Laffer argued that Britain’s recent economic performance demonstrated the dangers of pursuing higher taxation in an attempt to stabilise the public finances.
“Your record is not illustrating a good set of policies,” he said. “It’s really indicating exactly what you see when [an] economy gets in the death spiral.”
His warning was echoed by the British Chambers of Commerce, which has described further tax increases on businesses as a potential “road to ruin”.
Shevaun Haviland, the BCC’s director general, said the Chancellor should instead use the Budget to reduce the costs facing companies.
“The Chancellor must use his first budget to cut the cost of doing business, allowing everyone to reap the economic benefits,” she said.
“Piling more taxes on firms, would be a road to ruin, and the quickest way to destroy business confidence.”
The business group has called for action to reduce industrial energy costs and business rates, while also proposing measures to improve employment prospects for younger workers.
Among its more controversial recommendations is the abolition of the state pension triple lock, with the resulting savings used to finance cuts to employer National Insurance Contributions for workers aged under 25.
Lord Jim O’Neill, a former economic adviser to Mr Burnham who declined a formal role in his government, has also argued that ministers should address what he has described as the “excesses of the triple lock”.
The growing alarm over fiscal policy has also spread to financial markets.
Pimco, one of the world’s largest bond investors with more than £1.5trillion under management, has warned that Britain is suffering from a perceived loss of economic and fiscal credibility.
Rupert Harrison, the firm’s senior adviser for the UK and a former chief of staff to George Osborne, said investors were demanding a premium to hold British government debt.
“The UK is paying a premium because of a perceived loss of economic and fiscal credibility,” he said.
Mr Harrison pointed to persistent inflation and rising government borrowing as central concerns. While borrowing costs have increased across advanced economies, Britain’s have remained comparatively elevated for an extended period.
The gilt market endured a particularly difficult week, with the yield on 10-year government debt briefly reaching its highest level since August 2007.
Britain recorded the sharpest rise in borrowing costs among the G7, reflecting investor concerns over the public finances and uncertainty surrounding the forthcoming Budget.
Kenneth Rogoff, the former chief economist of the International Monetary Fund, has gone further, warning that Britain could be among the wealthy world’s most vulnerable economies in the event of a debt crisis.
Prof Rogoff, who led the IMF’s economics division between 2001 and 2003, said recent turmoil in bond markets posed a particularly serious threat to the UK.
“The UK and the US might be the two most vulnerable countries, and probably the UK more vulnerable,” he said.
He warned that high debt levels, elevated interest rates and political constraints could create the conditions for a wider fiscal crisis.
“If your debt is high, the interest rates you’re paying are already high, you’re politically paralysed, often that’s a recipe for having a debt crisis,” he said.
In such circumstances, Prof Rogoff suggested, Britain could ultimately face the prospect of seeking assistance from the IMF.
The deterioration in market conditions has also placed pressure on the Government’s fiscal headroom. The £23.6billion buffer against its fiscal targets available at the spring statement has been steadily eroded by higher bond yields and inflation linked to the conflict in Iran.
Mr Healey is expected to attempt to shift attention towards growth in a major speech on Monday, when he will announce a £150million fund aimed at supporting fast-growing businesses in northern England.
The programme, delivered through the British Business Bank, will provide investments of between £5million and £15million to innovative companies seeking to expand.
The Chancellor is expected to argue that targeted public investment can unlock significantly larger amounts of private capital and support economic growth outside London and the South East.
But the announcement comes only weeks before his first Budget, with the Government facing increasingly difficult choices over taxation, spending and borrowing.
A Treasury source said: “He also knows that growth is not possible without fiscal stability and is determined to ensure this country’s finances have a buffer against global uncertainty.”