TAX rises may lead to a longer period of inflation as workers ask their bosses for more cash, a North West Hampshire MP has warned.

The warning comes as Treasury minister James Cartlidge opened the second day of debate in the House of Commons on the autumn statement.

During the debate, former Conservative minister and MP, Kit Malthouse told the Commons: “First we need to bear in mind that in a tight labour market tax rises can prolong inflation.

“If in effect through tax rises you give people a take-home pay cut at the same time as they are seeing perhaps higher costs in their mortgages and higher costs generally from their costs of living, then they are likely to start to demand more from their employers.

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“That has a possibility I am afraid of sparking a wage and price spiral, particularly as we know as the secondary effects of this inflation will take some time to work their way through the system. Possibly months if not years.”

He also warned ministers about their plans to reduce debt as a proportion of national income.

He added: “Chasing debt to GDP could sometimes become a hare that they are unable to catch.

“If the actions you take from a fiscal point of view and a monetary point of view damage your GDP number, if GDP is to fall, you have to work even harder to reduce your costs, your debt against that number.”

He went on to call on the Government to reconsider its tax plans in the spring, warning that the UK could not “tax our way to prosperity”.

He added: “What I hope is that when we get to the spring budget, as I say, that global winds that are blowing against us have receded somewhat but also frankly that we can restore our belief in capitalism.

“Because my strong view is the only way we are going to get out of this hole, and a number of Members have said the same over the last few days, is through growth.

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“We are not going to tax our way to prosperity, we are not going to tax our way out of this debt to GDP problem.

“We need to inject growth into the economy and the only way we will do that is by letting those wealth creators free, by loosening the ties that bind them, by looking at the regulation and indeed the taxation on capital in particular so that people are willing to take risk.

“And one of the most dismaying choices I have to say in the budget has been the increase in capital taxes that are proposed, not least because that is changing the risk-reward ratio, meaning that it is less likely that people are going to go out there and start a business.”