Time for honesty on tax: we will all need to pay more

It’s not going to happen before the election, but one of these days, politicians will have to level with voters about tax.

Over the weekend, the Labour Party pledged to introduce higher rate income tax on people earning over £80,000, if it gets into office. That’s about 1.6m people. The party says 95 per cent of people will not pay higher income tax, and there won’t be a rise in VAT. This might make good politics for the beleaguered party, but the proposal is dishonest. So too is the Conservative Party—though for slightly different reasons. The party had previously pledged not to raise taxes, but Philip Hammond has now said that he doesn’t want to be bound by this, and it is thought that while VAT would not rise under the Tory government, income tax and national insurance contributions might, for some people.

Where is the honest debate about tax? The main economic issue, quite simply, is whether we have the tax structure right in this country, bearing in mind a) the deficits that aren’t going to away any time soon, especially as the economic costs of Brexit cumulate and b) the elephant in the room, which is age-related spending on healthcare, social care and pensions. When you consider these things, it becomes clear that taxes will, at some point, have to rise for most of us. Labour’s policy therefore does not go far enough.

We have been through almost a decade of public expenditure restraint or cuts already. The political climate for further restraint is difficult, especially as far as age-related spending is concerned.

But something will have to give.

According to the OBR, government spending on current laws will rise by 4.8 per cent of GDP by 2060. That’s about £80bn in today’s money, and it’s mostly due to age-related spending. Healthcare is predicted to rise from 6.4 to 8.5 per cent of GDP, and pensions from 5.5 to 7.9 per cent of GDP. By 2060, the OBR expects public debt will have risen to 230 per cent of GDP. Get the picture? Someone is going to have to pay for this, and that’s not just a few millionaires, FTSE 100 companies, banks, and those earning more than £80,000; it’s all of us.

Looked at another way, if we had to cost all the existing programmes for health, social care and pensions until 2060, allow for inflation and make no bold claims for productivity, the so-called “net present value” of age-related spending commitments would be about 80 per cent of today’s GDP, according to an EU-wide study sponsored by the European Parliament. That’s what it would cost if the government had to write a cheque today for all future commitments, which fortunately, it doesn’t—but it gives you an idea of what’s at stake.

There’s no two ways about it, taxes have to go up. Income tax is about a quarter of total receipts, national insurance and VAT are about 17 per cent each. Corporation tax is about 6 per cent, and then the tax take tapers quite quickly with the next largest, fuel duty, business rates and council tax, all at about 4 per cent each. The government can tinker with other taxes for the sake of efficiency, fairness and incremental revenue, but if our public services are to remain in reasonable health, the extra funds will need to come from hikes in these mainstream taxes.

On twitter, someone noted that Labour’s £80,000 proposal would cost the “rich” £3,750 each per year if the government wanted to raise £6bn. Those hit might cringe, but they would probably accept this. The point is not that they shouldn’t be asked to pay, but that they alone cannot fund the UK plc. We all have to. Zero-rating, reduced rates and exemptions in the VAT scheme cost £71bn, according to the Institute for Fiscal Studies. VAT is regressive, so we have to be careful if we ever want to recoup more, but we could have an intelligent debate about all the items that are not charged at 20 per cent, and see if the justifications still hold, and for whom.

For most people, the most pressing issue in public services is the NHS and social care. The NHS budget of £120bn is predicted by the Department of Health to rise to £133bn by 2020/21. That’s a rise in real terms of a miserly 1.2 per cent per year, which is a third of the past long-term rise in NHS spending when our demographics were far less burdensome. The working age population (tax payers) is going to fall from 64 to 59 per cent of the population by the middle of the century, and the proportion of older citizens will rise from 18 to about 25 per cent. That’s a rise of 7m people, corresponding to a compound annual rate of 1.2 per cent—the same as the NHS Budget rise in the next five years. Yet, there is no allowance here for the existing financial and staffing shortfalls in the NHS and no allowance for hospital and medical care inflation, professional and nursing staff needs, new technologies and drugs, the number of people that end up in hospital when they should be in care, and so on. Notwithstanding the stopgap measures mentioned by the Canceller in the recent Budget, the King’s Fund, Nuffield Trust and Health Foundation continue to point to large funding gaps in social care this year and for the foreseeable future.

So, getting 1.6m people to pay 45 per cent tax is a very “income redistribution” thing to do, but in the scheme of things, it is insufficient. The Tories’ tax plans likely will be as well. We need to have a grown up discussion about how to pay for the age-related public services that as individuals and family members we all demand. That discussion is about raising a meaningful percentage of our almost £2trn GDP, about tackling benefits paid to better off citizens, and about spreading the higher tax burden around much more.