Taxing times
Tax, spend and public opinion
“We’re not going to save the planet by bankrupting Britons” said the Home Secretary shortly before Rishi Sunak pushed back the ban on new petrol and diesel cars and delayed or cancelled other net zero policies. Just the other day, Paul Johnson of the IFS recently described a “very tough time on the spending side” if we don’t raise taxes. There is an urgent need to rethink fiscal policy but what will the public tolerate?
Britain, and Britons, might not be bankrupt yet, but Birmingham City Council is. Many of the crisis within our ‘polycrisis’ era are rooted in underinvestment and a fallout from austerity. Economic inactivity and an ageing population allied to high borrowing costs will also mean the country risks spending beyond its means, despite tax rates already being at above-average levels, historically.
If the country’s finances can’t be bolstered by achieving economic growth — a failing which isn’t exceptional to Britain but seems especially elusive here — then further tax rises or spending cuts, or both, will be necessary. Politics is about choices, and these are tough ones.
As Chancellor, Sunak briefly took on one of these issues, floating the idea of road pricing to plug the large fiscal black hole which electrification would create. The Johnson Government introduced and then scrapped the health and social care levy. More recently, there has been some brief media attention to the viability of the ‘triple lock’ and speculation about the future of big-budget HS2.
Introduced in 2010, the triple lock sets the state pension in line with the highest of prices, wages or 2.5%, and has been credited by Chancellor George Osborne with lifting pensioners out of poverty. However, the Institute for Fiscal Studies (IFS) recently calculated that the policy had added £11bn of state pension spending per year more than the base case indexation — a significant sum, roughly equivalent to the cost of the repair bill for school buildings in England.
At first glance, the triple lock is very popular. A YouGov survey in 2021 found two-thirds of the public wanted to keep it, six times the proportion who would scrap it. Many of those under-40 — a group particularly animated by the inequity of increasing the state pension at a time when wages are stagnant or public spending cuts are required — still backed retention when presented with these scenarios.
Public and political intransigence is symptomatic of three main factors. The first is the powerful effect of loss aversion. Introducing a fiscal policy and giving people money is one thing, taking it away is another, particularly after the subtractive periods of austerity and the cost-of-living crisis.
Next is politics, including a deep-seated electoral worry about the ‘grey vote’, the constituency of older voters, larger in number and more likely to turn out to vote than younger cohorts. Alongside this, fiscal policy operates against a backdrop in which tax has taboo status. It has long been received wisdom that raising taxes is electoral suicide.
Third, public opinion is more nuanced than a cursory glance would suggest. This complicates matters. ‘Public spending’ and ‘tax’ are blunt, catch-all terms but different taxes are seen differently by different people, as are different types of spending. For example, recent Ipsos polling has found inheritance tax is seen as one of the most unfair taxes, along with council tax and fuel duty.
When it comes to prioritising tax cuts — a possible policy come General Election year — according to Ipsos, the public tend to prefer cuts to council tax and fuel duty than inheritance tax. The tax they would most like to cut is the basic rate of income tax, while preferred tax rises tend to be targeted at the rich or in the form of windfall taxes. Fairness matters. Ipsos’ polling on the health and social care levy found concerns about fairness towards the young and poorer people, concerns shared by older people and those on high incomes.
What about spending? Ipsos’ trend data shows the public reacting to austerity by expressing support for more Government spending in the late 2010s with support falling after the high-spending Covid era. There are some signs though, that support is beginning to tick upwards again. Describing the latest British Social Attitudes Survey findings, Professor John Curtice identified a thermostatic swing back towards ‘big Government’. A majority of the public remains in favour of higher taxation and government spending.
These are not yet top order issues of concern for people who are much more sensitive to the cost of living, but they will likely become more salient as the autumn brings early drafts of election manifestoes and an Autumn Statement. In the past few days, Rishi Sunak has caught the zeitgeist to some degree albeit controversially; people are sensitive to the personal costs of net zero among other policies but Ipsos has found them split on the merits of delays or cancellations to policies to reduce emissions. On tax and spend, 79% don’t trust the Conservatives but 56% don’t trust Labour.
The Prime Minister talked about “proportionality”, the need for an “open and honest debate” and “taking people with you” on net zero. That applies equally to Britain’s fiscal predicament and solutions.
Recommended: BBC Radio 4 The Briefing Room — The UK’s financial headache (21 September 2023)
