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Why the Conservatives cannot be the tax cutting party


 

“Former Tory
cabinet minister David Davis said on Saturday that if the
Conservatives were to become known as the party of high taxes, the
damage
to their economic reputation would be as deep and lasting as that
inflicted on John Major’s government by the disaster of Black
Wednesday in September 1992.” according
to
the Guardian. Is he right to be worried? As I
pointed
out
after Sunak’s Spring Statement, for the average
worker most of the fall in real wages after tax over the next two
years is down to higher taxes. By next financial year compared to
last year, the
average pre-tax wage is expected to fall by 1%, but by 3% after tax
as Sunak’s tax rises take hold.

The
reason is partly higher national insurance contributions, but also
Sunak’s decision last Autumn to freeze income tax allowances over a
number of years, which at a time of high inflation brings in a lot of
money because it takes a lot of money off taxpayers. We can see the
impact that both of these tax increases have on the government’s
overall tax take by looking at the OBR’s series for national
account taxes.

As
many have pointed out, the share of total taxes in GDP is now
expected to be higher 
than
at any time since WWII.

It
was partly Conservative MPs’ unhappiness with this prospect that
led Sunak to focus on tax cutting in his Spring Statement rather than
helping the poor cope with rising prices. Unfortunately, because of these numbers from the OBR, cutting taxes a bit after you
had raised them a lot just six months
earlier
didn’t really cut it with public opinion. Partly as a result, Sunak
is
reported
to be furious

with the OBR, making the OBR yet another part of the UK’s pluralist
democracy (after the courts and the civil service) that Tory
ministers are furious with. (In Hungary, whose government is so
admired by some on the right, the independent fiscal institution
was
the first to go
.)

Sunak’s
political failure of a few weeks ago will not stop him trying the
same trick again, shortly before the next general election. He has
already pledged to cut the basic rate of income tax by 1 percentage
cent point, and if things go to plan he has scope to do more than
that yet still claim debt as a share of GDP is falling. However,
unless he is very lucky, the share of taxes in GDP will remain higher
than it has ever been.

So
how did Sunak find himself raising taxes as Chancellor for a
political party that likes to see itself as the tax cutting party? As
I have argued on a number of occasions, it is not because either the
Chancellor or Prime Minister is more left wing than earlier
Conservative holders of that office. Instead it is the result of two
factors: health spending and austerity.

The
reality that is outlined in all the OBR’s long term fiscal
projections is that, as the UK population grows older and for other
reasons, the share of spending in GDP on health and social care is
bound to rise over time, just as it has since WWII (see the third
chart
here,
for example). As
health
care is

provided by the state in the UK, that means that taxes must rise
(or
borrowing must increase by more and more each year
).

That
is why there is an underlying upward trend in the share of taxes in
national income, which is clear from the Chart above. The one
sustained exception to this inevitability of higher taxes was over
the Thatcher period, but that was both short-lived (reversed while
the Conservatives were still in power) and the result of two one-off
factors: North Sea Oil (see
here)
and privatisation. Of course good macroeconomics implies that neither
should have been used to cut taxes, but that is another issue.

This
upward trend in taxes would be even more evident if it wasn’t for
two other things: falling defence spending after the end of the cold
war (the ‘peace dividend’) and 2010 austerity. The former is over
(and there is no obvious candidate to take its place), and the latter
cannot be repeated because most areas of public spending have been
cut back to levels that risk political costs for those in power. This
includes the NHS, where waiting lists are
now
longer

than at any other time.

On
NHS spending the Chancellor in particular, and this government more
generally, have made two big mistakes which will mean the extra
spending they have provided for the NHS and social care will do
little to improve health services. The first mistake was to declare
the pandemic over
before
it was
,
which intensified the pressure of Covid on the NHS and is likely to
mean waiting lists will continue to rise for some time. The second
was not to treat any ‘catching up’ from operations delayed by the
pandemic as a cost to be paid for by higher borrowing (like the
furlough scheme) rather than by higher taxes. Sunak was too quick to
try and demonstrate his deficit cutting prowess, rather than
accepting that the pandemic would have fiscal costs even after it had
actually ended.

Another
potential mistake may be to allow higher inflation to raise taxes,
but to leave short term nominal spending plans unchanged. The
immediate difficulty this will cause is to squeeze even further
(relative to the private sector) public sector pay. Public sector
workers will of course try and avoid this squeeze, and it’s unclear
whether any disruption that follows will be more politically costly
to the government or opposition. The longer term difficulty is that this represents a further squeeze to real levels of public spending, which austerity had already cut to the bone.  

As
2010-17 austerity has squeezed the public sector as far as politics
will allow, and pressure from an ageing population means that public
spending is bound to rise over time, that means that any Chancellor,
of whatever colour, is likely to have to raise taxes as a share of
GDP over their period of office, unless that period is very short. A
Conservative Chancellor may raise taxes and public spending by less
than a Labour Chancellor, but ‘raising taxes by less’ does not
have the same electoral appeal as ‘tax cutting’ for Conservative
MPs.

Is
there any way out of this arithmetic for Conservative MPs? Ending the
NHS, and replacing it by some kind of insurance scheme, is an
alternative that has attracted some ministers in the past, but it
faces a political obstacle that will be very hard to avoid. Beside
the goodwill most voters have for the NHS, any insurance scheme will
be particularly expensive for older voters, who of course tend to
vote heavily Conservative.

Privatisation,
which is ongoing, is not immediately costly in political terms
(because it is hidden from most voters), but it is likely to make the
NHS more rather than less expensive and therefore will increase the
pressure to raise taxation. This is because the NHS, even though it
is heavily under-resourced, is pretty efficient. Thus if it remains
free at the point of use, provision in private hands will end up
being more costly for the government to pay for, because private
provision, even if it is equally efficient, needs to divert some
profit to shareholders. So NHS privatisation, while it may be pursued
for other reasons, does not get the Conservatives out of their need
to raise taxes.

So
Conservative MPs who think their party can once again become one that
reduces the overall tax burden are living a fantasy. Of course the
party and its Chancellor can, and will, raise taxes to cut them by
less later and hope some people do not notice the trick being played.
In addition the party and its Chancellor can, and will, raise some
taxes so that others can be cut and hope some people do not notice
the trick being played. But the wish to be a tax cutting party will
mean that most public services including the NHS will, under a
Conservative government, be permanently and chronically underfunded
because the party, and its Chancellor, still has the dream of cutting
taxes.

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