The Conservative Party is slowly realizing that it is becoming the party of taxation, and it really doesn’t like it.
I wrote last week that when the Chancellor discovered he had more money than expected by the Office for Budget Responsibility (OBR), the only real question for his budget was how it was going to be allocated between higher spending and lower borrowing. The tax cut – even after the announcement of £40billion in tax hikes earlier this year – was never factored in.
Notes from ministers in the conservative Home cabinet suggest that the budget and spending review saw Rishi Sunak’s popularity take a hit: he fell from his usual second-place position to 12th. Among his critics appears to be the chancellor himself, given that he inserted a section into his budget speech that espoused the virtues of a limited state after spending the previous 40 minutes expanding it. If the Chancellor is not convinced by her economic strategy, it is not at all surprising that party members are beginning to doubt it too.
The sad reality for those calling for lower taxes is that the current situation is partly inevitable and partly self-inflicted. Inevitability is the consequence of an aging population. The demands on our health and social care systems will only increase and unless we shift the burden from the taxpayers to the users of these services (and with social care we are moving in the opposite direction), the taxes will have to increase.
It is also the case that we have gone through a long period of significant restrictions on public spending that it is no longer politically possible to maintain. Some areas of public spending obviously need more – the judiciary comes immediately to mind – even before we tackle the challenges created by the pandemic.
All this against the backdrop of a government elected with the support of voters who previously voted Labour, and whose instincts on economic issues lean more left than right. The conservatism of small states is unlikely to please the Red Wall.
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Requests for increased spending could be handled much more easily without resorting to tax increases if the economy was growing strongly. But, given the Covid rebound, this is unlikely with growth forecasts of 1.3% in 2024 and 1.6% in 2025.
The OBR’s assessment of the permanent economic scars caused by Covid could be reduced below the current estimate of 2%, but there is no reason to believe that the damage caused by Brexit will be lower than the 4% estimated (see graph above). ) – emerging trade data is consistent with previous OBR analysis. On the contrary, these figures will prove to be underestimated if the UK provokes a trade war by triggering Article 16 of the Northern Ireland Protocol (as many in the EU expect once Cop26 is over). .
Government ministers dismiss the 4% figure as old news, almost a matter of bad taste even when increasing it, but it is an extraordinary sum. In terms of tax revenue, it constitutes around £30 billion a yearwho – in this case – is the amount that George Osborne warned should be increased in additional taxes if we vote for Brexit. This is the self-inflicted element.
The combination of these factors means that high taxes are here to stay and, given demographic pressures, the tax burden is likely to increase over time.
There are three questions that all political parties should ask themselves. How should we increase these revenues equitably, efficiently and sustainably? How to deliver quality public services as efficiently as possible? And how to increase economic growth?
These are, of course, eternal questions, and difficult ones at that. There is little evidence that they are at the forefront of the government’s mind. Tax increases have been driven by political expediency (higher corporate tax rates are an economically damaging way to raise revenue), as has spending policy. Crowd-pleasing entry targets (“20,000 more police!”) and pots of money for marginal seats are unlikely to offer good value.
As for encouraging growth, that could be an important contested area. The Labor criticism that we have high taxes because we have low growth holds promise for them if pursued vigorously. The challenge for all parties will be to answer the question: what will you do to generate higher growth?
This is not an easy question to answer credibly. High on the list of government policies are free ports, which were dismissed by the OBR as irrelevant.
Giles Wilkes has recently convincingly demonstrated that it is very difficult for a government to increase the rate of growth, but it is relatively easy to reduce it. This is one of the reasons why the 4% of GDP hit by Brexit is so significant – it would take a very long list of politically courageous and controversial measures to even begin to offset it.
Here is a suggestion. If opposition parties want a growth strategy, their most credible approach is to point to that 4% figure, identify the cause – a hard Brexit – and promise to reverse as much as possible. If we really want to lower taxes, there is no alternative.
[See also: Britannia Chained: why the legacy of Brexit threatens Boris Johnson’s Global Britain]