Back in April, I put forward some thoughts for what the Chancellor should do after COVID (Tax Journal, 17 April 2020). The crisis has gone on for much longer, and the level of support which the Government has provided has been much greater, than I expected in April. The Chancellor has now abandoned plans for an Autumn Budget, and instead on 24 September announced his winter economy plan. This is, therefore, a good time to reflect on what the tax system should be for the longer term.
Despite the very high level of this year’s deficit, the consensus is that raising taxes in the short term would be the wrong thing to do. But in the longer term, borrowing will have to come down eventually, and there are also significant pressures on spending. Writing in The Times on 28 September, Paul Johnson of the Institute for Fiscal Studies (IFS) commented that Sunak’s big test will come as the crisis eases.
Sooner or later, all Chancellors have to be unpopular – either by reducing spending or increasing taxes – unless they are fortunate enough to be in power at a time when the economy is growing strongly.
But even in the medium term, it is going to be politically very difficult for Sunak to raise taxes. The 2019 Conservative manifesto clearly promised that, “We will not raise the rate of Income Tax, VAT or National Insurance” as well as maintaining the triple lock on state pensions. The triple lock is likely to deliver a significant windfall to the elderly over the next two years, since they are likely to get 2.5% next year (as wages are generally falling, and inflation is low) followed by a larger rise as wages probably bounce back. Over the two years, this will increase intergenerational differentials, at a time when many younger workers will have been hit hard by job losses in sectors such as retail and leisure. It is rumoured that Sunak wanted to abolish, or at least suspend, the triple lock, but that Johnson insisted that breaking a manifesto pledge was unacceptable.
It therefore seems likely that the battleground will arise over the manifestos for the next general election – assumed to be in 2024 (although the Fixed-term Parliaments Act 2011 has not, so far, reduced the frequency of general elections as much as might have been expected). It is hard to see a Conservative Chancellor setting out plans for significant tax rises, and Labour are likely to remember how John Smith’s proposal to raise the top rate from 40% to 50% in1992 was swiftly labelled ‘Labour’s tax bombshell’ by the Conservatives.
And yet there is no magic money tree. If we have to bring borrowing down at some point, and if further austerity is likely to be even more unpopular than tax rises, then taxes are going to have to go up eventually. Others will be commenting in these pages over the coming weeks about which taxes are likely to be the most popular (or perhaps the least unpopular) for a Chancellor to raise. What I think also needs to happen is a clear focus on the process of making tax policy, with much more public education and engagement. In 2017, the Chartered Institute of Taxation, IFS and The Institute for Government published a paper on just this topic, Better Budgets: making tax policy better, and it would be good to see this revisited.
More recently, the think tank Demos have undertaken an interesting exercise in which they ran a series of events, using a nationally representative sample of people, to judge the level of support for different tax rises. The full report is available from the Demos website, and there is also a tax calculator – useful for those who would like to pretend to be the Chancellor, and particularly to see how much different changes would add to national revenues. A particular benefit of this is that it might help us to move away from the ‘don’t tax you, don’t tax me, tax that man behind the tree’ approach to tax reform; while many people might agree that the rich should pay more, in my view there also needs to be acceptance that in order to raise significant sums of money, most people are going to have to contribute something.
What I would like to see is a wide-ranging consultation from the Treasury, setting out options for the long-term direction for the tax system. I was a fan of the Corporation Tax roadmap of the coalition government in 2010, and I believe that a clearer statement of what the Government wants to achieve with the tax system would help build public support. The earlier an outline is published the better. Let’s see if we can agree on a direction of travel, and then work out the details of how to get there.
Who knows, we might even achieve tax simplification at last.
First published in Tax Journal.