It is not whether taxes will go up – but who will pay

Boris Johnson’s social care ‘plan’ may have sparked political infighting, but the real battle will be over how the burden of a higher tax era will be shared, writes Phil Thornton

The size of the state, with higher taxes and more spending, is set to be permanently made bigger by the UK government’s social care reforms, according to the Institute for Fiscal Studies (Joe Giddens/PA) (PA Archive)

The news that the tax burden in the UK will rise to its highest-ever sustained level should not in itself be a shock.

The impact of the Covid-19 pandemic and the urgent need to refinance the NHS while finding a solution to the social care crisis meant debt or taxes were going to have to rise.

The real surprise is that this takes place under a Conservative administration. The fact that the purported mass rebellion against it by Tory MPs faded shows that the low-tax zealotry of the Thatcher era is no longer dominant.

Strategists at Deutsche Bank see a “long road ahead of global tax rises” given both the soaring levels of debt and mounting demographic pressures.

The March budget put in place plans to raise the tax burden to 35 per cent of national income by 2025-26, the highest since 1969. The Institute for Fiscal Studies (IFS) says now taxes will reach their highest sustained level in the UK.

The demographic time bomb has been ticking for some time. In March the National Audit Office (NAO) warned adult social care would form an “ever-increasing” proportion of public expenditure.

Successive governments have failed to tackle it for fear of a political backlash — Andy Burnham’s “death tax” and Theresa May’s “dementia tax” — when it emerged who would have to pay. Even Boris Johnson took two years to implement a pledge he made on the doorstep of 10 Downing Street in July 2019 to “fix the crisis in social care once and for all”.

The moves could have been funded by debt. The Biden administration is pushing through a $3.5 trillion (£2.53 trillion) package of measures including “soft” programmes such as affordable childcare.

But the UK seems to have had its fill. Debt has indeed risen sharply in the wake of measures to counter both the global financial crisis and now the Covid-19 pandemic, reaching 105 per cent of annual GDP this year, its highest since 1959. The return of inflation and the prospect of hikes in interest rates has made taking on more debt less alluring.

With high levels of government debt no longer a divisive political issue, the country is moving into an era where higher taxes are no longer the clear dividing line between right and left.

The low-tax hegemony has not always been dominant in the UK although, to be fair, only those born in the 1950s would have grown up before Margaret Thatcher established a consensus around cutting taxes, consolidated under Tony Blair, and strengthened under David Cameron’s coalition.

Go back to the 1960s and the figures show there was a sustained and significant increase in the tax burden under both the main political parties. General government revenue increased by 8.5 percentage points to 42.1 per cent of GDP between 1964 and 1970, according to the IFS. Over the following 15 years, the tax share fluctuated without any obvious trend up or down.

The challenge for Sir Keir Starmer will be how to oppose a tax-and-spend plan which, in other circumstances, might have been proposed by a Labour government.

The answer lies in the types of taxes being imposed. The use of a 1.25 per cent rise in both employees’ and employers’ National Insurance contribution (NICs) has serious economic implications.

As a tax on earned income, it will disproportionately penalise those in work versus those in retirement or living off unearned income — including underpaid NHS and social care workers.

This is a continuation of a long term trend. The IFS has another useful statistic showing that a working-age person with average pre-pandemic earnings will now pay 20 per cent of their income in income tax and NICs while a pensioner receiving the same amount in pension income will pay just 11 per cent. Back in 1978–79 the equivalent figures were 33 and 27 per cent respectively.

As employers will also have to pay the tax, they will be incentivised to depress wage growth, reduce staff numbers, or cut business investment. For firms this is a third of a triple whammy that will see the end of the super deduction investment incentive and a six percentage point increase in corporation tax in 2023.

An across-the-board rise in income tax would have spread the burden more widely and included a greater contribution from those who will benefit from it the most — home-owning pensioners.

A one-off or annual wealth tax must now feature on the radar. Left-wing Labour MP Richard Burgon secured a Commons debate around a petition for a “higher taxes on the super-rich”.

The government rejected the call but an independent Wealth Tax Commission (WTC) has suggested a one-off levy of 5 per cent on wealth of more than £500,000 to raise £260bn.

This is where the economic battle will be fought: not over whether taxes should be raised, but by how much, with what levies, and who pays. Some 40 years after Thatcher’s 1979 election victory, the pendulum is finally swinging back.