Blog resource for 6th Form, with contributions from teachers and students.
Quote of the day
“I find economics increasingly satisfactory, and I think I am rather good at it.”– John Maynard Keynes
Wednesday 28 February 2018
Higher taxes as appetite for austerity wanes?
Critical reading for the exam. This is current context writ large - remember the key details and use them in a fiscal policy/public spending/public services essay:
Britain’s long-standing opposition to tax-rises is slowly softening
Politicians on right as well as left are beginning to confront the need to raise more money
DENIS HEALEY had a bittersweet message when he took to the stage at Labour’s annual conference in 1973 with a pledge to increase taxes. There would be “howls of anguish” from the rich, the then shadow chancellor promised delegates in Blackpool. But he added: “Before you cheer too loudly, let me warn you that a lot of you will pay extra taxes, too.” Pay they did. Two years later, Healey raised duties on alcohol and tobacco and increased the basic rate of income tax from 33% to 35%. It was the last time a British chancellor moved the basic rate upwards.
Today such rhetoric—and such a policy—is alien. The tax burden as a share of GDP has dropped some three points below where it stood in Healey’s day. Income-tax rates have fallen steadily, as tax-free allowances have risen (see chart). The bracing, revenue-raising budgets of the past have given way to ones that trumpet tax cuts and do their best to disguise measures that might bring in more money.
Yet the long-term tax-cutting trend may be over. If the quality of public services—in particular, the National Health Service—is to be maintained, Britain faces the grim prospect of across-the-board tax increases. Healey’s budget, one of the harshest in the post-war period, raised tax equivalent to 1% of GDP. According to official estimates, putting the country’s finances on an even keel requires permanent tax rises in the region of 2% of GDP each decade, for many decades to come. Political minds on the right and left are turning to the question of how to raise this kind of money.
Until recently, politicians could dodge tough decisions on tax. From the 1950s to the late 2000s, the economy in general and wages in particular grew much faster than they are growing today. That made it easier to collect extra revenues. In the decade to 2008, bankers’ juicy salaries and rising employment meant that income-tax receipts rose by 60% in real terms, despite a softening of the income-tax regime.
As a result, the public is unused to the idea of structurally higher taxes. A hysterical political culture and round-the-clock media coverage makes it hard for chancellors to take unpopular decisions, says Kenneth Clarke, who did the job in 1993-97. “A few years ago [an increase in taxes] would not have been regarded as sensational,” he says. “People knew perfectly well that sometimes taxes went up and down.” In 2002 Gordon Brown increased national-insurance contributions (NICs), promising the extra money for health care. But such boldness is rare. These days, governments prefer to raise money by stealth. In the Healey budget of 1975, there were eight big tax measures. In George Osborne’s budget in 2016 there were 86 crafty little ones, including higher taxes on landfills.
But the reality of Britain’s financial straits is forcing a rethink. The best estimates say that the NHS needs another £20bn ($28bn) per year by 2022, equivalent to 1% of GDP. Other departments are also squealing. This week the head of the army issued ominous warnings about the need for more cash. Voters will have to pay more or receive even less—and after eight years of cuts, they have no appetite for the latter.
The two main parties are responding, albeit cautiously. Labour talks boldly about raising revenues, including by reversing recent cuts to corporation tax. But even its avowedly socialist leaders blanch at increases to tax for anyone bar the rich. They have ruled out increases to the basic rate of income tax, VAT or NICs. Only those earning over £80,000 a year—about the top 4%—would face higher taxes (a policy which might not raise money at all, in part because high earners are adept at managing their finances). Recently a shadow minister raised the prospect of those in big houses paying more council tax. He was promptly forced to resign.
Among the Tories, there is a growing clamour for more spending, if not yet for higher taxes. This week Boris Johnson, the foreign secretary, took a break from his day job to demand that the NHS receive an extra £100m per week. When it came to the matter of how to pay for it, Mr Johnson fell back on the idea of a “Brexit dividend”, an optimistic notion given that Brexit is expected to cost the exchequer money.
But some in his party are thinking seriously about how more revenue could be squeezed out of voters. Last year the Tories’ election manifesto promised to make asset-rich pensioners pay more towards the cost of their care in later life, by including the value of their homes in assessments of their means. The policy’s poor design meant that it was rightly criticised as a “dementia tax” on those unlucky enough to run up large bills for social care; it was hastily dropped. Yet many Tories remain open to tapping the wealthy. “There is a critical mass that tax on wealth will have to happen at some point, as the system is unsustainable. It is something the prime minister is cautiously interested in,” says Chris Wilkins, who was head of strategy in Downing Street until last summer.
Others, such as Nicholas Boles, a former Tory minister, have suggested raising NICs, arguing that the idea might win public support if it were made clear that the revenue went to the NHS. Various technocrats, including Nick Macpherson, a former permanent secretary at the Treasury, have given cautious backing to something akin to a hypothecated tax for the NHS, an idea normally unpopular with economists.
Tax reform is unlikely during this parliament. The legislative calendar is crowded by Brexit and the government has only a slim majority. Slowly, however, political tectonic plates are moving. The prime minister is under increasing attack for her timidity. Polls show that half of voters think taxes should rise, the highest proportion since 2004. If the public want to maintain current levels of public services, they must pay. Eventually the government, and the opposition, will have to take their lead from Healey and admit it.
Y.
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