Dropping the 1p tax rise has political costs too

It’s easy to forget how little even politically engaged voters see of our conferences. Some family members – middle-class voters in a rural Conservative seat, environmentally inclined and still considering who to vote for next year – saw just one headline from the past, and it was “Lib Dems drop pledge to raise income tax”.

Their verdict? “Disappointing”.

Changes to a major policy are something to be done with caution and care. Any political benefits of a change need to be weighed against the costs. Shifting positions can weaken a party’s brand, making it less clear to voters what we stand for unless we have a powerful narrative to explain why circumstances demand such a change. Shifts also need to be weighed carefully for credibility, especially when it comes to taxation policy, the shoulders on which the costs of building a liberal society need to be carried.

Dropping the 1p income tax increase, frankly, fails such an analysis. The truth is that dropping one of our longest-standing pledges weakens a party brand that, as John Curtice pointed out at conference, is already getting eaten away at by Labour and the Greens as voters don’t know where we stand. It weakens it at both ends too, reducing our ability to show ourselves as a fiscally credible progressive alternative and coming at a real cost to liberal spending priorities. Fixing the NHS, repairing our social safety net – these won’t be cheap, and voters will see past any pretence to the contrary.

The line that our leadership, like that of Labour, are opting for on tax is that it wouldn’t be “credible” to raise taxes more than the Conservatives. But raising taxes more than the Conservatives is exactly what voters expect parties of the centre-left to do: it’s priced in to voters’ expectations of our manifestos. Not only that, but the nature of the UK’s challenges right now creates another enormous credibility risk for the party. The investments we need in public services, social security, and green development are very large indeed, and there is no credible way to prevent those services from further degradation, build green homes and infrastructure, and achieve carbon emission reductions at the speed we need without being able to fund larger state interventions. One cannot turn up to a burning building with a child’s sippy-cup of water and credibly claim to be a fireman.

The party political risks are also significant. When we face a general election, we will have a far larger electorate than for our by-election wins, who will be far more motivated by national and online messaging and will include many people less inclined to read focus leaflets. On repairing public services, allowing the Tories to keep up with us on what funding we can pledge and opening ourselves up to attacks from a resurgent Green Party may lead key segments of voters to decide against voting our way in seats that we ought to be pulling out of Conservative hands. If we want voters to back us to stop the Tories, we need to make it clear that we represent a meaningful difference and are willing to not just end Tory incompetence and psychodrama but also Tory neglect of the services and security nets that people up and down the UK rely on. Dropping the 1p increase sends precisely the wrong message to many voters, and reduces the extent to which we can credibly offer a strong alternative to the Conservatives.

We should recognise this move for what it was – a misstep that damaged our economic credibility at a time when we need to be building it. It would be embarrassing for the leadership to reinstate the 1p move before the general election, but a search should urgently be underway to find a new tax package to make up for this self-inflicted shortfall, with the possibility of reintroducing it kept on the table. We need clear, honest, credible policies on tax – and we should recognise better the real political risks we take by ducking the challenge of raising revenues.

* James Baillie is a member and activist from Breckland and a former chair of the Lib Dems' Radical Association. He lives and works in Vienna, Austria, as a historian specialising in digital methods and on the history of the Caucasus region. He blogs about politics at thoughtsofprogress.wordpress.com.

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26 Comments

  • Sandy Smith 28th Sep '23 - 6:40pm

    If the current plan is to attempt to build our vote by trying to be a ‘nicer’ or ‘more competent’ version of the Conservative Party, then what on earth is the point?

  • Tristan Ward 28th Sep '23 - 8:22pm

    The political reality is that in the vast majority of our target seats, even if all the voters of non- Conservative parties voted Lib Dem, we would not win. To win where we start second, those who historically voted Tory need to vote for us.

    As we dicovered after the end of the coalition, we can’t change things if we have no power.

  • The Conservatives have already raised income taxes by freezing personal allowances and increasing corporation tax from 19% to 25%. Neither the Conservatives or Labour will raise income tax rates in the face of a cost of living crisis. Labour’s main tax policy seems to be focused on eliminating the non-domiciled taxpayer status.
    I would agree with the conclusion of the article that “We need clear, honest, credible policies on tax” but that lies with making the tax system considerably more equitable and progressive. Perhaps starting with reform of Council tax and taxation of windfall profits in the banking and energy sectors.

  • Alex Macfie 29th Sep '23 - 7:56am

    “it’s a mistake to assume that Conservative voters are as low-tax-at-all-costs as some Conservative MPs.” More to the point, those Conservative voters who do support low-tax-at-all-costs and/or right-wing populism are not the ones who are ever likely to switch to us.

  • David Symonds 29th Sep '23 - 10:10am

    Lib Dems may have made a tactical error in abandoning the 1p increase in income tax. Whilst no one wants to see taxation any higher than what it is, the state of the public services are such that new monies are needed rather than just borrowing. Also the income tax thresholds have been frozen by the Tories until 2028 so that is a massive tax rise in itself over a period of time. The 1p increase in tax should be in fact increased to 2p and the public would prefer honesty rather than pretend that new taxes are not needed to deal with the problems we face as a nation.

  • Nonconformistradical 29th Sep '23 - 10:41am

    I thought Ed’s point was that given the still ongoing cost of living crisis now was not the time to push for an income tax rise.

    Especially given the extent of stealth tax resulting from frozen thresholds

  • @Nonconformistradical: Yes I think that’s exactly the point. A 1p rise to fund services would make a lot of sense if we were in a time when everyone was well off and we’d had a Tory Government that had recently been cutting taxes. It doesn’t make so much sense and is not likely to be well received at a time when a Tory Government has already been raising taxes (yet services haven’t improved) and we have a cost of living crisis to boot.

    What I think would be both fair and very sensible economically is to propose shifting the tax burden back from indirect taxes to direct taxes, and also consider merging NI into income tax – which would imply a rise in the income tax rate.

  • Peter Martin 29th Sep '23 - 4:14pm

    Raising taxes generally will, at the moment, benefit for younger people who are struggling to pay increased mortgage costs too.

    I admit it will be a hard sell, but the way it will work is that an increase in the rates of taxation will reduce aggregate demand and so the rate of inflation. This will mean that the BoE will reduce interest rates quicker than they would otherwise. It is making everyone who is paying tax responsible for reducing inflation rather than just those who are repaying housing and other loans.

    However, it is quite likely we’ll see an economic crash before the next election. If so, it wouldn’t be appropriate to raise levels of taxation. Taxation should be used to regulate the economy. It doesn’t provide money for government spending.

  • Nonconformistradical 29th Sep '23 - 4:32pm

    @Peter Martin
    “Raising taxes generally will, at the moment, benefit for younger people who are struggling to pay increased mortgage costs too.”
    How, if they are earning enough to pay tax will a tax increase help them? Seems to me it’ll just make it harder for them to pay the mortgage (or rent)

  • A 1p rise in income tax would be expected to raise about 5.5 billion across the year, about 2 weeks debt service costs at the current expected cost of circa 131 billion per year. In August 2023 alone, debt interest was £5.6bn How much money is the UK government borrowing, and does it matter?

  • In my view we should keep the 1p rise whilst raising the income tax threshold to about £16000. Then we could present ourselves as a tax cutting party for low earners and say if you work 30hrs per week on the minimum wage you won’t pay income tax.

  • Peter Martin 30th Sep '23 - 7:34am

    @ Nonconformistradical,

    You’re right insofar as that this is what most people will think. So, politically it is just not possible to win any votes with this policy, irrespective of any economic merit in it.

    The inflation we have just experienced, and are still experiencing, had a variety of causes. One of which was the loose fiscal policy run by the government during the Covid epidemic. The contribution of this factor is arguable. Some might consider it was the most significant. However, even if they are right about that, it doesn’t make any sense to try to apply a monetary solution to a fiscally caused problem.

    It would have made more sense to reduce aggregate demand by increasing taxes for all as a temporary measure, rather than putting all the burden on the young via higher rents and interest payments.

    No doubt it could have been sold as a policy of having to pay the delayed bill caused by the Covid spending. It’s not quite the right explanation but it is closer than the arguments for the need have higher interest rates.

  • Peter Martin 30th Sep '23 - 7:56am

    @ Joe,

    You’ve previously gone along with the general mainstream argument that an increase in interest rates is necessary to cool inflation.

    However, here you are saying that the current expected annual costs to the government of these higher rates is £131 bn per year. If anyone proposed that Govt should spend this amount on anything else without covering it with extra taxation you’d be telling us in no uncertain terms that this would be irresponsible inflationary spending.

    You’re telling us that an extra £100 bn or so of deflationary spending on higher interest rates makes an £55 bn or so of extra spending on more sensible things impossible because this would mean the standard rate of income tax would have to rise by 10p to prevent inflation.

    Go figure!

  • Much of the interest on public debt goes towards funding private pensions and is partially recaptured by taxation, but the distributional effects proportionally favour retirees and investors with significant savings, investments and pension pots.
    Taxes have already been increased significantly under this government and will continue to increase regardless of who is in power. The reason is demographics and the fast rising dependency ratio. The UK population is rapidly aging as the baby boomer generation reaches retirement age and with it the real costs of state pensions, healthcare and adult social care.
    In past years, significant increases in taxation in a stagnant economy would cause a recession and with it increased unemployment. We have not seen that yet although unemployment has begun to rise. Unemployment may not be rising as feared because demand is being sustained by an older population with housing equity and pensions while the workforce is shrinking.
    That begs the question of who should bear the burden of these inevitable tax increases. I would argue that the productivity of the workforce has to be increased by directing investment away from inflating existing housing assets towards productive investment. The tax reforms required to achieve that redirection are a shift of the incidence of taxation away from wages and firms reinvesting profits in tangible assets and intellectual property to Land rents and other forms of economic rent extraction by way of financial leveraging.

  • David Symonds 30th Sep '23 - 4:52pm

    I wrote to the Labour Party asking them to back off their cynical and unfair attack on Lib Dems. I do not understand how Labour (a so called Progressive Party) wishes to spend more time rubbishing Lib Dems than putting forward their own message. In Mid Beds a split vote for the two leading anti-Tory parties will only provide comfort and succour to the Conservatives and i fear they may hold the seat. Getting Tories out of power must be a priority but under FPTP a Labour inflated majority could end up like the 1970s with the union paymasters demanding large salary rises and fuelling inflation. I remember 25% inflation and union barons at no.10 for beer and sandwiches. Strange too that Labour prefers Tory Governments and Tories prefer Labour Governments and attacking their mortal enemy helps them get votes. Labour should not forget that Liberals in 1892 helped elect Kier Hardie, the first Labour MP and a deal was done in 1903 with Herbert Gladstone to help get 30 Labour MP’s elected in 1906 and that kindness was repaid by Ramsay MacDonald in 1924 wanting to rub out the Liberals as a viable force, in fact he preferred Baldwin winning in October 1924. That is gratitude and i don’t believe that Labour any more than Conservatives are to be trusted.

  • Wages did increase significantly for most jobs in the 1970s. “The average weekly wage in 1970 was £18.37, in 1979 it was £68.92. The 1979 wage in 1970 money was £23.79. An increase of 30%” How much did people earn in the 1970s?
    The pay rises negotiated by the Unions in the 1970s were in good part a reaction to soaring inflation that began in the mind 1960s and had reached 9.2% before the Opec oil crisis Is stagflation coming to the UK? This Bank of England paper Monetary policy and stagflation in the UK analysed the causes of the inflation of the 1970s concluding that “that the inflation outcomes of the 1970s can be understood as a combination of monetary policy neglect—which implies that policy-makers did not let interest rates respond strongly to the take-off of inflation—and mismeasurement of the degree of excess demand…policy-makers were slow to recognise the 1970s productivity slowdown, and accordingly used out-of-date and over-optimistic estimates of productive potential when setting policy…results provide support for the ability of monetary policy to deliver stable inflation, even in the face of very large shocks, provided policy follows an inflation-targeting framework.
    “According to our simulations, even with the sequence of cost-push shocks observed in the 1970s, all but 0.6% of the 9.3% rise in mean annual inflation in the United Kingdom in the 1970s could have been avoided if monetary policy had been different and information regarding the degree of excess demand in the economy had been accurate.”

  • Peter Martin 1st Oct '23 - 10:30am

    “which implies that policy-makers did not let interest rates respond strongly to the take-off of inflation …….. the 9.3% rise in mean annual inflation in the United Kingdom in the 1970s could have been avoided if monetary policy had been different”

    Naturally monetarists will claim that past mistakes could have been avoided if monetarism had been adopted earlier. No surprise there.

    However, if we look at what actually happened in the real world we can explain what happened quite well without so-called ‘monetary theory’.

    I’ve never been too keen on German economic theory but at least we can’t criticise them for ever, at least in the post war period, running a too loose fiscal policy. Consequently whereas our inflation peaked at over 20% in the 70s theirs peaked at something less than half that. That would have still been high by German standards which shows there were other factors involved in the 70s inflation besides a rise in wages. There was a genuine supply shock due to the rising price of oil.

    If there is a shortage of apples we will see a rise in the price of apples. If there is a shortage of oil we’ll see not just a rise in the price of oil but a rise in the price of just about everything else too. There’s not much any economic theory can do about that.

  • When apples cost more you eat less apples. When oil costs more you drive less or cut your spending on other goods and services and hence the prices of those other goods and services tend to decline. Fuel price increases, other than driving, are most directly felt in delivery and production costs i.e. in goods markets. In a service based economy like the UK the impact in goods markets is felt in import costs. When import costs rise spending on imported goods tend to decline Income effect
    Oil shocks are a relative change in the terms of trade that make consumers poorer and oil producers richer.
    Inflation of the money supply reduces the purchasing power of money, partly as a consequence of attempting to maintain consumption levels with additional credit creation when the terms of trade are deteriorating.
    The research published by the Bof E MPC Unit and Monetary Analysis Unit provides insights into what policy makers were thinking in the 1970s, what went wrong and the lessons to be learned to avoid a repeat of those mistakes. Mainstream economic analysis should not be confused with Friedman/Chicago school monetarism.

  • Increases in Price levels in Germany in the 1970s were relatively short lived reducing most of the time and nowhere near the levels seen in the UK.Like the UK, inflation began well before the Opec oil shock as a consequence of imported US inflation during the Vietnam War Germany Inflation Rate 1960-2023
    The Opec oil shocks saw German inflation rise to 7% in 1973/74 but had fallen back below 3% by 1978. The Iranian revolution saw another spike to 6% in 1980/8,1 but that was back to 2% by 1985. There was another spike in 1991/92 as a consequence of the large deficit spending necessitated by the reunification of Germany. Inflation remained around 2% until the aftermath of the pandemic in 2022, when it spiked again as a consequence of large deficit spending driven by the need to support households and firms during the pandemic and changes in the relative terms of trade as a consequence of the Russo-Ukraine war.
    Germany’s trade surplus is declining over time with trade deficits last year. The Imf reckons that the country’s economy will grow by only 8% between 2019 and 2028, about as fast as Britain, the other European struggler. Over the same period, France is forecast to grow by 10%, the Netherlands by 15% and America by 17% The German economy: from European leader to laggard

  • Peter Martin 1st Oct '23 - 7:23pm

    @ Joe,

    Good point about the Vietnam war having an affect on inflation at a time when both the £ and the DM were defined against the $. I fail to see how an application of monetarist economics by either the Bundesbank or the BoE could have done anything about that though. It wouldn’t have stopped the war!

    The only point I would disagree with in your other comment is a reliance of the various forecasts of the IMF and others. They’ve never been too good in the past. I doubt if you’d like to see Thomas Frank, the Brentford manager, sacked on the basis that a panel of football experts had predicted they were going to be relegated before the season had actually started 🙂

  • Harold Wilson didn’t stop the Vietnam War but he did keep the UK out of it, devalued the pound, increased the bank lending rate to 8% and made big cuts in defence spending.
    It has been a slow start to the season for Brentford without a win yet, but Thomas Frank has more than proven himself since he came to manage the club and is on a five year deal until 2027.

  • Joe Bourke,

    A 1p rise in the basic rate of income tax would be expected to raise about £5.7 billion in the first year and £6.95 billion in the second and a 1p rise in higher rate of income tax would be expected to raise a further £1.3 billion in the first year and £1.8 billion in the second year (https://www.gov.uk/government/statistics/direct-effects-of-illustrative-tax-changes).

    Marco,

    Increasing personal allowance by £3,430 would cost nearly £22.3 billion in the first year.

    If the personal allowance was increased by £1000 it would cost £6.5 billion in the first year and £8.35 billion in the second. Increasing all the rates of income tax by 1p and increasing the personal allowance by £1000 would provide the government with £700 million in the first year and £780 million in the second. This could have been party policy.

    A person earning £33,000 a year would receive £200 from the personal allowance increase and pay an extra £194.30 from the 1p rate increase, meaning they would be £5.70 better off.

  • @ Michael BG I see your point, it would be a big giveaway to raise thresholds that much. However given inflation levels I feel that a £1k rise is too modest. What about if we introduced a 2p increase for people earning over £30k or a 10p rate for people earning £13750 – £16000?

  • Macro,

    I support the idea of a new higher rate for those earning above £33,000 but any estimate of how much 1p would raise is a guess. Perhaps half of £7 billion if it included the higher rate or £2.2 billion if it didn’t.

    A rate of 10p on £2250 would cost about £7.3 billion in the first year and about £9.4 billion in the second.

    So doing both together would stimulate the economy by £5.1 billion in the first year and might increase inflation by nearly a quarter of 1%.

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