Speculation is rife the Government is planning to raise taxes in the Budget; the only questions seem to be who they’ll tax and for how long.
Time will tell; I don’t think big tax rises are a given yet, given the economic and political risks associated with such a decision and this Government’s tendency to kick hard decisions down the road until they’re sure they can carry opinion with them.
However, let’s assume the Government are going to raise taxes. Others on this site are better qualified to discuss the relative economic merits of such tax rises, but I set out here where the public are on the subject – and therefore how they might respond to different options said to be under consideration.
Don’t think tax, think living standards
In the 80s and 90s, the Conservatives won elections in part through their aggressive campaigns on tax; they savaged Labour on tax ahead of the upset victory in 1992.
In the three elections since, their tax campaigns weren’t enough to stand up to Blair’s juggernaut. Consequently, in this period, it became commonplace to think the public weren’t bothered about tax at all. And indeed, most contemporary polls on people’s political priorities tend to show the issue of “tax” as being very low down the list of public priorities.
But while “tax” sits low in the polls, “cost of living” or “living standards” are much higher; these are the questions we should be looking at in judging people’s attitudes to tax levels.
The question on tax is in part a question on income: people oppose most tax rises when they’re feeling poor. Massive numbers of people across the country – particularly those in the private sector outside the South East – have had a shocking year and their living standards have taken a battering. Tax levels really matter again, particularly where they directly eat into income.
Fairness, as ever, matters hugely
I know I’m obsessed with the English obsession of fairness, but here we go again: people must believe tax rises are “fair” – in their scale, operation and in who they hit.
Tax rises can never be too large; they must not be retrospective (for example by changing the rules in a way that punish people for lifestyle choices they made many years ago); they must not punish people who have, for example, already paid tax on some of their income; and they should not be targeted at those who are struggling.
Think of those taxes that have attracted public scorn in recent times: the “bedroom tax”; inheritance tax; and the prospect of raiding people’s accounts to pay for social care (effectively a tax). Each of them breached the public’s view of fairness.
Clear policy goals matter
In Westminster, it’s common to hear “people accept tax rises but always on others”. There’s some truth to this, but it needs explanation. Most people are willing to accept higher taxes if they think it’ll do some good.
This is why they initially went along with Gordon Brown’s tax rises in the early 2000s (they were seen as being directly linked to spending on public services), and why they also accepted higher taxes to pay for an increase in NHS spending recently.
It’s also why they are open to taxes being used to promote greener and cleaner lifestyles; while there’s scepticism about politicians’ motives on green taxes, they are open to the tax system being used, if it must be, to deliver policy outcomes like reduced air pollution and so on.
People know there’s no magic money tree
In France, politicians have been up in arms that so-called “Yellow Vest” activists want both higher spending and lower taxes; it’s a criticism occasionally levelled against new Conservative voters.
But it’s generally unfair criticism; most people know the money has to come from somewhere and debt must be repaid; they also know businesses pay a lot of tax. With this in mind, while given a choice they will often say tax “big business” first, they also know this isn’t cost free because it effects their ability to hire and retain staff.
What does all this mean? Probably five things.
Firstly, most fundamentally, any tax rises in the short term will be unpopular. No surprise there, perhaps, but the point is this: taxing families in a downturn is bad, but taxing their employers will be unpopular too.
It’s easier, as Labour discovered in the late 1990s and early 2000s, to raise taxes when the economy is doing well. It’s hard to see how the Government will be able to raise taxes and not take a hit somehow. Politically speaking, it’s about choosing the least-worst option; there is no clever route that will make the public think the Government has pulled off a wonderful move.
Secondly, and consequently, the Government should look to cut unnecessary spending wherever possible before raising taxes. People are opposed to tax rises but might reluctantly accept them – as long as it looks like Government has done everything possible to avoid them.
This provokes an immediate response: where on earth would you cut? Education? Welfare? Surely not in a downturn. This is a fair question; but the Government must at least be seen to try to reduce waste (incidentally, Labour are clearly alive to this, as they’ve been increasingly banging the drum on waste).
Thirdly, big bold changes like a wealth tax or equivalent risk political disaster. As discussed, English people go mad when rules change and they find themselves punished through no fault of their own. In this case, telling a group of thrifty, hard-working, older middle-class people they’re going to get whacked because the Government has previously enacted policies that caused their house prices to rocket would be completely politically insane.
With this in mind, politically speaking the Government would be better off pulling the levers that people understand: things like corporation tax, VAT and so on. While they would still be unpopular, they wouldn’t deliver massive losers – or, rather, massive new losers. Better to play safe.
Fourthly, the Government should consider one-off hits, justified by the need to pay for a year of massive but necessary largesse. Just as Labour introduced a one-off “Windfall Tax”, so the Government should consider one or more similar emergency taxes. People like to know what tax rises are for; they like them to be justified. There has probably never been a better time to justify a single, simple, one-off tax rise.
Fifthly, and finally, the Government should ignore the noise in the media on which products, sectors or businesses are popular or not as they consider who to tax. Instead, the Government should look at the actual choices ordinary people make in their daily lives: how they get to work; where they work; what they buy; where they buy; how they buy; and so on. The choices people actually make in life are usually the ones they really don’t want taxed.
Pretty soon, the media will be saying this Budget will make or break Rishi Sunak. A solid budget with no major political mistakes and commentators will be practically redecorating Downing Street on his behalf; a different outcome and you know the rest.
He will be encouraged to be big and bold and to do everything from launch Global Britain, to “level up” the country, and to pay off a massive chunk of new debt. I strongly suspect, when it comes down to it, he’ll play safe by using the tax system in the way we’ve all come to know – and he’ll announce that the Budget will be followed in short order by new statements on spending. In other words, he’ll try to stop people thinking this is a “one off” event.
But at the same time he’ll be thinking of his version of a Windfall Tax – and that could get dropped at any time.