The Conservatives have not presented a convincing plan on Spring Budget Day. They reduced National Insurance payments, but they also used fiscal drag to increase overall taxation, whilst failing to provide adequate resources for most public services.
Fiscal drag works in a covert way, hence it is regarded as a stealth tax. As salary and pensions increase, a larger part of our income is taken away in tax when, as the Conservatives have done since 2021, tax thresholds are not increased in line with inflation.
Public services in crisis include local government, the police, the justice system, and prisons: with the Conservatives’ plans they are all facing unrealistic real-terms reductions in funding.
The NHS
The NHS, conversely, is expected to receive a limited increase in financial support, but this “may just about stop things from worsening” according to the chief executive of the NHS Confederation: it is not enough to bring about the required improvement in health and social care.
Mental Health services are in crisis because of inadequate funding, according to a recent British Medical Association report (It’s broken, March 2024). As a consequence, we are currently seeing increased numbers of working age adults being unable to work due to poor mental health care.
Investment and immigration
Another concern is that the Tories’ plans will not provide the investment required to address the climate change emergency.
The Tories have portrayed immigration as a problem but, actually, immigration has benefitted our economy and tax revenues as shown in a report by the Office for Budget Responsibility (Economic and fiscal outlook, March 2024).
Post-election tax concerns with both Conservative and Labour
The Conservatives’ post-election spending plans are really worrying. Paul Johnson (Institute for Fiscal Studies, Spring Budget 2024 presentations) commented on the fact the Conservatives’ proposal to completely abolish National Insurance payments after the election is not realistic and “not worth the paper it is written on”.
Paul Johnson, though, has also been critical of the opposition, because they “have been just as shy as the chancellor about … what they actually intend to do on taxes and spending after the election.”
Taxes in the UK are lower than in many other developed economies. Not raising taxes to the level required to deliver good public services is a false economy: the NHS and other services will not be there for us when we need them.
What is wrong with the current tax system is that it is not progressive: it is not the richest who pays the highest tax rate.
In theory we have three tax rates (20%, 40% and 45%), so that nobody should pay more than 45%. In reality, this is not the case as the Conservatives have introduced many tax anomalies which make people with medium-high income pay a “marginal tax rate” (the tax rate paid on the highest part of income) much higher than 45%.
For instance, parents with income above £50,000 have suffered from a reduction or loss of child benefit, resulting in a marginal tax rate of up to 64.75%. This has only been partially corrected in the recent Spring Budget.
Anybody with income between £100,000 and £125,140 faces a marginal tax rate of 60%, due to loss of the personal allowance. Furthermore, if you are a parent earning more than 100,000, loss of the entitlement to free childcare may result in a marginal tax rate of more than 100%! Earning more becomes counterproductive.
What should be done
If I was the Chancellor, I would increase all three tax rates (20%, 40 and 45%) but I would utilise only part of this extra revenue to provide better public services. I would also increase the personal tax allowance and the tax thresholds to compensate those on lower incomes, and I would eliminate all the anomalies resulting in high marginal tax rates.
So far, the opposition has been reticent to spell out what they would do differently after the elections. Will they be more open when they release their election manifestos?
Some political commentators believe that Labour will campaign on a promise not to raise taxes, but will depart from this position after two years, or even earlier if public services fall apart. However, honesty before the elections would be preferable.
