The front page of The Times on 20 September reported Jeremy Hunt saying that “we can’t let tax rises go on forever”. Other conservative politicians have been even more brazen in demanding tax cuts right now.
Liz Truss is one of those demanding immediate tax cuts, and there is even speculation she may want to be a candidate in the next Conservative Party leadership election. But is she not the same former Conservative Prime Minister whose premiership ended in ignominy because of unfunded tax cuts?
Rishi Sunak has addressed the recent Conservative Party conference with these words: “I know you want tax cuts. I want them too”.
Tax increase
Actually, according to a report by the Institute of Fiscal Studies (IFS, 29 September 2023) we have suffered from the largest increase in taxation under the last three Conservative Prime Ministers (Boris Johnson, Liz Truss, Rishi Sunak) than in any previous parliament since WW2.
Chaotic administration, Liz Truss’ disastrous mini-budget, and poor management of contracts including HS2 have all contributed to this, as well as Brexit. However, the main causes of increasing taxes are demographic change, health service pressures and the need to unwind austerity.
We should put the current taxation level in perspective. The Our World in Data Taxation website allows to make comparisons. Taxation has increased dramatically in all developed countries since 1910 but taxation in the UK is currently lower than in many other European countries.
Political commentators believe that Sunak may announce tax cuts in the March 2024 budget, just before the general elections. The Conservatives may regard this as a clever move: it may win them some votes whilst, in all probability, it will have to be Labour, after the elections, to face the conundrum on how to deliver the required public services improvements without adequate taxation revenues.
We know that the Conservatives will promise tax cuts. Does it make sense for Labour and the Lib Dems to copy the Tory tax and spending plans, in order to deflect any accusations of being a high-tax party?
In previous elections the Lib Dems committed to a 1% increase in income tax to address the underfunding of the NHS, social care, and education. Tim Farron, the Lib Dem leader in the 2017 elections, argued that voters recognised the need to “chip in a little more” and the 1% tax increase was supported by as much as 70% of the electorate.
What is different now is that we have suffered from a cost-of-living crisis, but salaries have now started to catch up with a declining inflation. Good public services are critical for those with lower incomes.
When schools and the NHS are failing, those on low incomes do not have the option of private education or private healthcare. If the police or the justice system are failing, criminality gets out of control starting from poor neighbourhoods.
After 13 years of Conservative government our public services are in dire conditions. Thus, there is a case for some increase in taxation across all three tax rates (20%, 40% and 45%).
The money raised could also be used to eliminate some taxation anomalies. The Tories did not want to be seen increasing the tax rates, thus they froze both the personal allowance (the amount of income we do not have to pay tax on) and the income thresholds above which we pay taxes at the higher 40% or 45% rates.
This failure to increase the personal allowance and the income thresholds in line with inflation (so called “fiscal drag”) has disproportionately affected those on lower incomes and has been correctly described as a stealth tax, which is less fair than an equivalent increase in the tax rate.
Professionals with higher incomes face a “tax trap”. With incomes between £100,000 and £125,140 there is tapering of the personal allowance which results in a 60% marginal tax rate. How could it be fair to pay a tax rate of 60% with these earnings, whilst those earning above £125,140 have a marginal tax rate of just 45%?
The choice we face is between higher taxes or a decline in public services. We should carefully scrutinize the spending and tax commitments.
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