‘Read my lips: no new taxes’; ‘we will reduce net immigration to the tens of thousands’; ‘we pledge not to increase tuition fees’. Promises easily made in an election campaign. A source of endless regret in government.
There will be endless regret from Labour’s manifesto commitment not to raise tax rates on taxes accounting for three quarters of tax revenue. There is an urgent and compelling need to raise taxes in the coming budget for reasons of fiscal prudence and to stem the decline in public services. Yet, despite having an enormous parliamentary majority, the government has denied itself a mandate properly to address these fundamental problems.
We are now facing a budget on Wednesday which will, in all probability, fail to produce promised improvement in services and, by using several complicated tax devices, annoy almost everyone including businesses needed to restore the growth on which long term improvement depends.
The IFS estimates (within a wide margin of error) that around £20 billions of extra taxes will be needed over and above Labour’s already promised taxes if further erosion of public services is to be avoided and promised budget discipline maintained (balancing the government’s day-to-day, current, budget). Other estimates are of £40 billion or above. And that does not include measures to tackle child poverty (the ‘two child limit’), to sort out the near-bankruptcy of local government and of universities and to address social care.
£20 or £40 billion sounds a lot but a 1p rise in income tax on top of basic and higher rates would raise almost £10 billion. A 1% rise in VAT would raise £7 billion. Both could rise substantially and still be well below Scandinavian levels. There would, I suspect, be little resistance if there had been a grown-up conversation with the electorate, before the election, explaining that public services must be paid for and that Covid and the energy crisis left a bill which now needs to be settled.
So, if these major tax raises are to be ruled out, what can be done instead? In opposition Labour was able to rely on the magic money tree. It is possible that, in government, also, the fairies might help. The bizarre fiscal arithmetic around QE and the balance sheet of the Bank of England could be tweaked to relieve the government of some of the accounting costs of quantitative tightening -involving bond sales. But too much ‘tweaking’ will worry the bond buyers who don’t believe in magic, as Liz Truss discovered a few years ago.
This is especially so as one of the welcome, growth-enhancing, ideas for the budget is expanding government borrowing – bond sales – specifically for more public investment. As a veteran of -losing – battles with the Treasury over this issue I welcome Rachel Reeves’ determination to break out of the stranglehold of investment curbs. It is surely sensible if, as is proposed, public debt is offset against asset creation in a revised fiscal rule. But care is needed; the bond vigilantes will be suspicious that more public investment will simply disappear into a black hole like HS2.
It is balancing the government’s current budget which will require the tax increases. If higher income tax rates are ruled out by manifesto commitments, the government may cut income tax thresholds instead by allowing the continued ‘drag’ of inflation. Apart from creating the impression of deviously breaking a pledge, this mechanism is less progressive than an increase in the rate (when people pay more the higher their income): an odd choice for a government embracing the idea of tax ‘fairness’. It will also antagonise many middle-income earners who will be paying the 40% rate for the first time.
It seems certain that the government will increase employers’ national insurance since it has pledged not to increase employees’ NI. Taxing employers might seem more popular: ‘the bosses can pay’. But, in practice, employers’ NICs are a tax on jobs and will be passed back to workers or passed forward to consumers. Not clever.
Economists and left-wing politicians tend to agree on the desirability of taxing dead people, especially those with large property assets. Inheritance Tax is in the sights of the Chancellor who wants to cut ‘loopholes’. Capital gains on death is another possible revenue source. IHT does no obvious economic harm and taxes people who became rich, unfairly, by sitting on appreciating property values. And why should the next generation of billionaires also become billionaires without working for it? Unfortunately, the tax is extremely unpopular: seen as a ‘double tax’ on earned income and an attack on property millionaires in semi-detached suburbs rather than billionaires in detached mansions (who can also afford the best tax accountants to find new loopholes).
The Chancellor is also reported to be looking at other taxes affecting the ‘rich’ who tend, in practice, to be ‘middle class’. Tax-free contributions to private pensions are apparently in the Chancellor’s sights. But pension planning is complex and long term and people get very angry when carefully calculated policies are turned upside down by cash-hungry Chancellors.
Capital gains tax is another can of worms. It covers unearned increases in asset wealth but also the returns from high risk, high reward entrepreneurship which is needed to get the economy growing again. Disentangling the effects isn’t easy.
Another mooted tax raid is on motorists who have been protected from fuel duty increases for over a decade. There is a compelling environmental and revenue case for hiking petrol and diesel duties. But expect howls of outrage from rural and other areas badly served by public transport. And there is a growing worry that the more successful the policy in driving motorists towards electric vehicles, the fewer cars there will be to tax.
Not least there is a very unpopular tax which won’t be discussed in the budget, but which will be used to mop up some of the deepening pool of red ink in local government finance: council tax. There is a fundamental gulf in comprehension between those who see council tax as a basically sensible property tax, albeit needing reform of the banding structure and revaluation, and angry local residents who see it as a growing charge for deteriorating services like bin collection.
The Chancellor may produce some bold new ideas. The greater likelihood is a scattering of widely predicted and complicated measures with lots of unintended consequences and potential to create annoyance.
It would have been so much better to have told the public the truth about tax and prepare them for a few big, easily understood, increases.
* Sir Vince Cable is the former MP for Twickenham and was leader of the Liberal Democrats from 2017 until 2019. He also served in the Cabinet as Secretary of State for Business, Innovation and Skills from 2010 to 2015.
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16 Comments
What on earth a politician telling the simple truth about Tax. Well done Vince more please .
They could have just said “The financial situation is a lot worse than we thought, so we’re going to reverse those NI cuts JHunt did and possibly increase income tax to make sure that the public services you care about like the NHS continue to work” But they’re not very good at politics, it would seem.
The Tories and their tame media are going to attack them on tax anyway.
The very rich are clever in moving money abroad to avoid fair taxation. One thing they cannot move however is Land. Land value taxation is a great old Liberal idea whose time has come!
D J Shepard, It was Ed Davey who, as Liberal Democrat leader, dropped the promise to put a penny on income tax to invest in the NHS and social care….
What is the truth?
Vince is right about the general election; even Ed Davey did not tell the public what the OBR and IFS were saying, that WE ARE NOT A HIGH TAX COUNTRY, WE ARE AVERAGE. Look also at what Patriotic Millionaires are saying with their ideas of tax rises on wealth amounting to £60bn. Even if this is rather exagerrated it shows there is scope to do this in our wealthy nation. It reminds me of a story about a preacher who said to his congregation that there is good new because the church has the funds for their new project; he then said there is bad news because the funds are in their pockets.
em> ” a 1p rise in income tax on top of basic and higher rates would raise almost £10 billion. A 1% rise in VAT would raise £7 billion.”
Maybe. But only on the assumption is that everything else in the economy remains the same. Not a realistic assumption!
If government reduces spending it reduces its income. Think of Government spending being represented as filling up the bucket with a hose. Let’s put a slot in side of the bucket to represent it draining it out by taxation.
We could put in another slot to represent the net loss to the economy by running a trade deficit.
Higher spending means higher water levels in the bucket and more water draining out of the taxation slot. The can mean too much money being spent which could indicate an inflation problem. A reduction in spending is represented by a lower water level ( recession?) which causes less water to flow out of the taxation slot. If we make the slot wider, increase tax levels, we’ll initially get more water out of a wider slot but as the water level falls we’ll see less water flow out indicating lower taxation revenue.
The only way to equalise the water flow out of the taxation slot and the flow of water into the bucket (govt spending), ie have a balanced budget, is to completely close the trade deficit slot.
If anyone thinks a model based on a bucket and slot is nonsense:
https://en.wikipedia.org/wiki/Phillips_Machine
Might increased taxes and reduced supports affecting and/or aimed at the poor increase personal debts/debt?
If the is a “black hole” in the national finances, where has the money gone or not come from?
Who benefits from the [alleged] black hole?
Vince Cable,
It is lovely to see an article on here by you. I do hope you will respond to people’s comments.
We also didn’t engage in a grown-up conversation with the electorate about the need to raise income tax and national insurance contributions either. On page 1 of our Manifesto Costing document we stated, we wouldn’t increase ‘income tax, national insurance contributions or VAT’ (https://www.libdems.org.uk/fileadmin/groups/2_Federal_Party/Documents/PolicyPapers/Manifesto_2024/Funding_a_Fair_Deal_-_Liberal_Democrat_Manifesto_Costings_2024.pdf).
Expats,
Indeed, Ed Davey announced to the press the dropping of our party’s policy to put a penny on income tax to invest in the NHS and social care. We should have had an open discussion at Conference on dropping it. Especially as we often say it is the party members who make party policy at Conference.
“The Chancellor is also reported to be looking at other taxes affecting the ‘rich’ who tend, in practice, to be ‘middle class’”
The middle class – aka Liberal Democrat (and Tory) voters.
One other issue – alluded to by Vince Cable is that taxing capital to pay for day to day spending is the way ultimately to bankruptcy. Capital assets (including high quality education and a stable environment produce more capital and income that can be sued to maintain and increase spending. Running down capital ultimately destroys the ability to produce wealth.
Meanwhile public borrowing is now the highest since 1962 at 99% of the size of the economy, and we are promised increases.
A lot of the tax take will go on paying for this debt.
As the beancountrs at KPMG say: “The new chancellor faces the daunting task of funding the new government’s agenda, while maintaining public finances on a sustainable footing.
“A combination of high levels of spending and weak growth prospects will present uncomfortable choices – deciding between even more borrowing or substantially raising taxes if spending levels are to be maintained.”
https://www.theguardian.com/business/2024/sep/20/uk-debt-gdp-rachel-reeves
https://www.bbc.co.uk/news/articles/cgxqzp2zdw4o
Indeed Expats and MBG.
For some totally astonishing reason that will probably remain unexplained for all time, Ed and his inner circle of advisors decided that telling the public that something as widely supported and sensible as making it clear that 1p on tax for Health and Social Care was an essential first step to sorting out the Health crisis was just too much for a few voters to hear.
So once again Lib Dems being the grown ups in the room, being right from the very start and proved to be right once again on one of the key issues of our time was quietly dropped to increase our appeal to those few people who still believe that we need to fix things but don’t want to pay for it.
As a footnote, Dorothy Thornhill’s Report into the 2019 Election fiasco stated “The leader’s team formed a group who were taking most of the key decisions, often in isolation of input from people or groups whose input might have led to different choices,” and that “Rather than empowering others with responsibility many decisions were taken by a small group of people around – and including – the leader; this included overhauling Messaging and the Manifesto; which had been developed and researched over time.”
Five years later we are still making the same mistakes – dropping things where we are clearly and demonstrably right, simply because some people close to the top of the party think there is a short term electoral problem with being seen to be right.
Ed unilaterally dropped Europe shortly after becoming leader, just as the Tory and Labour mess on the issue was becoming clear, and now when everyone with any sort of understanding is saying we need to sort out social care, we drop making it clear where we stand by being afraid to say “This is so important, We are prepared to increase taxation to do it.”
We need to understand that things are so bad in our country right now that most people are not interested in Right or Left, Progressive or Reactionary, or even Liberal or Authoritarian.
They just want competence.
@David Evan’s – “ those few people who still believe that we need to fix things but don’t want to pay for it.”
From the media debate about the increase in employers NI and the minimum wage, we can expect this group of people to be very vocal later on today and in the coming weeks…
[Not saying the changes aren’t going to have an effect, as currently doing the analysis on how these changes are going to totally change the next 6 months financials of a charity I’m involved with.)
@ David Evans,
“We need to understand that things are so bad in our country right now that most people are not interested in Right or Left, Progressive or Reactionary, or even Liberal or Authoritarian.
They just want competence.”
What if 21st century capitalism is incapable of meeting the challenges ahead? Such as on the ever increasing levels of inequality in society and the need to combat climate change?
It won’t really matter how competent our leadership might be.
@Peter Martin. “ What if 21st century capitalism is incapable of meeting the challenges ahead? ”
I think, from the evidence over many decades, that probably is a given…
Perhaps Labour will make less rash manifesto promises at the next election following the uproar with how the ones previously made stifled their options. Generally, most people realise politicians make promises to be elected that might be challenging to keep to in office. Other Parties and the media take advantage of these unkept or unwise manifesto commitments. Ultimately it is up to the electorate to decide what punishment should be made at the ballot box and for Parties to weigh up what to include in their manifestos.