The trouble with promising tax cuts we can’t afford
Beware politicians offering to make cuts to the tax burden, says James Moore: given the alarming state of UK plc, any such pledges will either be junked after polling day – or will ‘salt the ground’ for the incoming administration
When I heard that the Institute for Fiscal Studies (IFS) had called on British politicians to show greater honesty when talking about the nation’s shaky finances, I thought: Really? In an election year?
The studiously non-partisan financial think tank has taken a look at what the two main parties have been saying, set against the daunting fiscal backdrop that Britain must contend with. Needless to say, it doesn’t make for a pretty picture. Think one of those headache-inducing splashes of violent colour one might see hanging in the Tate.
The principal problem faced by the nation is that the economy is chugging along like a banged-up old East German Trabant with a hairdryer for an engine. It is hard to see that changing, at least in the short term.
Both main parties have promised to reduce debt as a percentage of GDP, after it leapt during the pandemic and shot up again as a result of the government’s energy bailouts. That is going to be very tough to achieve when GDP growth is stuck on the hard shoulder.
According to the IFS, which has a long and jealously guarded reputation for competence, the current government’s plans imply a £20bn cut in day-to-day spending outside of the NHS, schools, defence, international aid and childcare, all of which are political priorities to a greater or lesser extent.
Needless to say, that will pose a severe challenge to whoever becomes chancellor at a time when the public services are creaking and, in some cases, close to falling over. Note that the government has just had to fund an emergency £600m support package for local authorities, several of which are staring bankruptcy in the face, on top of what was announced in the most recent settlement. Most of it is earmarked for social care.
It is easy to talk about cutting red tape and reducing waste, as politicians like to do when asked where they’re going to find savings. Much harder to put it into practice. Suffice it to say, that’s not going to make the numbers add up.
This brings us to the flip side of the coin: taxes. The other way of plugging the black hole the IFS identifies in the nation’s finances is to raise them. The problem with this is that the UK tax burden is at a record high, although the IFS notes that, compared with much of Europe, it is still in the low-to-middle part of the league table. Despite what some people would have you believe, it is perfectly possible to run a successful economy with relatively high taxes. Ask Belgium.
Of course, the trouble is that tax rises tend to be unpopular, which is why governments have got so fond of what have become known as stealth taxes. One of the sneakiest has been to freeze the tax thresholds, so that more and more people find themselves lifted into higher tax bands as wages rise – so-called fiscal drag.
Jeremy Hunt’s autumn statement was characterised as a giveaway in some quarters, with its national insurance cut and tax breaks for business investment. But it actually raised the overall tax burden. With an election coming in the second half of the year, and the MPs sitting behind him loudly calling for an aggressive tax-cutting Budget, he is not expected to repeat the trick when he unveils his Budget in April. To the contrary.
Working in Hunt’s favour are the sweeties delivered by the books in December, when Britain posted a much smaller than expected budget deficit of £7.8bn, less than half the figure of a year earlier and the lowest for that month since 2019. Falling inflation also cut the government’s interest costs. Capital Economics suggested that this lot combined gave him roughly £20bn to play with.
That is a handy sum to have lying around. And he will probably use it, creating a headache for Labour, which will probably – as it has in the past – promise not to reverse such a move. Keir Starmer and co will be well aware of the risks of going into an election with a pledge to reverse tax cuts.
Trouble is, tax-cutting will, in Starmer’s own words, “salt the ground” for whoever wins. They will either face the challenge of having to find £20bn of savings – so another round of austerity – or they will have to raise other taxes, or break their promises on borrowing.
The markets, as Liz Truss found out to her cost, would likely take a dim view of the latter. Could they somehow find a way to stimulate growth? Unlikely, unless there’s a pot of gold hidden in the Downing Street rose garden or some magic beans lurking among the thorns.
What UK plc could really use is a dose of investment. Trouble is, the current fiscal plans (according to the IFS) call for a huge cut in that, too. It is even scheduled to fall if Labour’s plans for £20bn of green investment are taken into account. Borrowing to invest is generally seen as “good” borrowing because, if done right, it should yield a return. The markets also tend to look more favourably upon it than they do on borrowing to cover day-to-day spending. Except, of course, it would call into question those pledges about cutting debt as a proportion of GDP.
And so, the IFS has called upon both parties to come clean on their plans: “As tempting as it may be to engage in ‘cakeism’ – to seek to have the government’s fiscal cake and eat it – any party serious about governing after the election should resist the urge. The electorate surely deserves better than that.”
We do, indeed. But I rather suspect we’re going to be served up so much cake on the day after the election that the entire nation will have to join WeightWatchers.
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