Looking ahead, current budget plans suggest no major shifts in policy direction. In fact, tax excesses can get even worse.

According to the Office for Budget Responsibility, the government’s latest five-year plan will raise the tax burden as a percentage of GDP to its highest level since the late 1940s.

Companies will have to increase their capital expenditure by 30% in terms of cash by 2026 just to prevent the tax-investment imbalance from worsening.

It would take a 55% increase in business investment by 2026 to bring the tax-to-business investment ratio back to its 2016 level. While the former seems possible, the latter seems less likely, to put it mildly.

Business investment is a complex process. Businesses base their decisions on a host of factors, including the legal and institutional framework, the actual cost of capital and expected real returns, the complexity and burden of regulations, and the potential for efficiencies through capital deepening.

Even if the UK looks favorable on these counts, and most of it does, sustained growth in business investment will be frustrated if fiscal policy cannibalizes private sector growth.

Accordingly, the much-needed rebalancing to boost private investment and raise growth potential must come from the political side – i.e. tax cuts combined with more moderate spending growth so that the deficit remains at a safe level.

Unless that happens, the UK may have to endure a period of sub-par real growth and excessive inflation until fiscal policy is reset to free up the private sector to deal with correctly the obvious imbalance between supply and demand.

Household consumption, which accounts for around two-thirds of GDP, is the main driver of demand. It has consistently surprised on the upside in recent years and looks set to stay strong. Household balance sheets are healthy, savings are high and labor markets are booming.

On the supply side, however, things are less healthy. Russia’s invasion of Ukraine added to the host of global supply-side challenges that emerged during the rapid recovery from the pandemic.

Meanwhile, labor markets are tight in the advanced world. Unlike the post-Lehman boom, the UK cannot simply generate growth by importing labor from overseas markets.

Even if the immediate inflationary shock subsides, lingering supply issues could keep inflation above the Bank of England’s 2% target – likely close to 3% on a sustained basis.