The Chancellor Philip Hammond has given us due warning. He told the good and the great of the City of London, gathered at Mansion House, that taxes are going to rise.
He gave no indication of which taxes would go up: that’s for his Budget in the autumn. All he said was that it would be done in ‘”a fair and balanced way”. Yet only a year ago in their election manifesto the Tories were promising ‘to reduce taxes on British businesses and working families’. So is the decision to raise taxes a betrayal, a sensible response to reality, or a bit of both?
Mr Hammond’s announcement directly follows the Prime Minister’s speech three days earlier in which she gave the NHS a £25bn birthday present to mark its 70th anniversary next month. The NHS budget for England alone will increase by over £20bn a year by 2023. Health was to be the government’s ‘number one spending priority’, she said.
In a remark which indirectly referred to raising taxes to pay for it, she said ‘we as a country will contribute a bit more’, but she added that the extra spending would partly be funded by the ‘Brexit dividend’, the money Britain will no longer contribute to the EU after we have left. That seemed a clear reference to the now notorious claim blazoned on the Vote Leave bus: ‘We send the EU £350million a week. Let’s fund our NHS instead’. Boris Johnson, the Foreign Secretary and leading Brexit campaigner two years ago, tweeted: ‘Fantastic news on NHS funding – a down payment on the cash we will soon get back from our EU payments’.
But the fact that the Chancellor is warning us that the extra health spending will actually have to be paid for through higher taxation comes as no surprise to those who regard the Brexit dividend claim as ‘tosh’, in the words of Sarah Wollaston, the Tory chair of the health select committee. She accused the Prime Minister of ‘treating the public as fools’ by reviving the claim, which has been almost universally ridiculed by economists.
They point out that even in simple arithmetic terms there will be no such dividend. By by 2023 Britain should be saving around £5.8bn a year that would have gone in contributions to the EU, but every penny (if not more) of that money has already been earmarked to fund areas of the economy such as farming that have hitherto relied on EU money, or to pay for our continued involvement in various EU joint projects and shared regulatory agencies, or simply to fund the bureaucratic upheaval that Brexit will inevitably entail.
But even more fundamentally than that, the independent Office for Budget Responsibility has calculated that whatever the long term economic benefits of Brexit may (or may not) turn out to be, the effect on government revenues will be a loss of £15bn a year by 2023. It was perhaps unsurprising, then, that the Chancellor, unlike his boss, made little mention of any Brexit dividend when he told us taxes would have to rise.
He made very clear indeed, though, that he would not countenance any extra borrowing to fund the new health spending. The government, he insisted, remained determined to cut the deficit (the gap between what it spends and what it raises in taxes) to zero by the middle of the next decade, a timetable that has already slipped many times. Mr Hammond wants to get the deficit and the overall level of government debt down so that when the next recession comes, as one day it inevitably will, he’ll have room to increase borrowing to keep the economy afloat.
Although recent borrowing figures have been encouraging, few believe they will turn out robust enough to allow him both to meet his targets and fund the extra health spending through borrowing. Some economic experts argue that the government should borrow more to fund investment projects while interest rates are so low, but few believe that that increasing borrowing to fund day-to-day is sustainable in the long run.
So increased taxation it is. The Chancellor may not have told us which tax increases he has in mind, but plenty of other people are speculating. The first port of call may simply be to cancel tax cuts that he had planned, notably the cut in the rate of Corporation Tax from 19% to 17% and a freezing of the levels of income tax personal allowances. The Tories promised to raise the amount of money people could earn before paying any income tax to £12,500 a year and to raise to £50,000 the point at which they’d have to start paying the 40% tax rate. These promises may be put on hold.
Together these might raise about £10bn a year, so he’ll still have to find more. Some are urging him to cut back on the tax perk the rich enjoy with regard to their pension contributions and others are pressing for increased taxation of wealth, notably property. Council tax, the bands for which have not been altered in over twenty-five years, is a ripe candidate for getting more money off home-owners but may simply be politically impossible for a government that lacks a majority of its own.
The sheer political difficulty of raising taxes, especially so soon after having promised to do the exact opposite, no doubt prompted Mr Hammond to warn his Cabinet colleagues on Monday that just because he’d agreed to extra spending on health, they shouldn’t imagine he was prepared to do the same for their own particular departmental budgets. Quite the contrary: the message was that health was going to be the only service that would get more money.
Yet the demand for extra spending in other fields is huge. Even as the extra money for health was welcomed, the overall policy was criticised for being far too cautious, not least in having nothing to say about the mounting crisis in social care, an issue inextricably bound with the problems of the NHS. It’s estimated that by 2030, the government will need to spend an extra £6bn a year on social care. And then there is housing, and the police budget, and schools, and so on. Eight years of cuts in spending have left a legacy of inadequate provision which, it’s argued, can be rectified only by increased spending and therefore, also, increased taxation.
Perhaps the most striking case is defence. Gavin Williamson, the defence secretary, has been mounting a very public campaign for an extra £20bn, the money he says the armed forces need simply to match their existing commitments. But he was told by the Prime Minister at what was described as a ‘tense’ meeting on Tuesday, that he had to go away and rethink the very basis of Britain’s defence capability, an approach that led to headlines suggesting that the Prime Minister was calling into question Britain’s future as a ‘tier one’ military power. Although Downing Street denied this, it was reported that ‘people have their head in their hands’ in the Ministry of Defence.
In short, what all this amounts to is a return to perhaps the most basic question in politics: do we want to have good public services and, if so, are we prepared to pay higher taxes to fund them? Or do we want to keep taxes as low as possible and forego some of the services we can then no longer afford? Efficiency savings – trying to get more for your buck – can always be made and the NHS has been trying to do just that, but there are limits to what can be achieved without extra spending when demand for the services is rising so strongly.
To many observers, this simple choice is the one democratic politicians find it most difficult to be honest about. They resort instead to airy claims of ‘Brexit dividends’ that don’t materialise, or promise tax cuts that they cannot then fulfil.
Mr Hammond’s warning of tax rises to come could be seen as coming clean. To some, though, it will amount to an act of betrayal: how can a Conservative chancellor even think about raising taxes when his party has so recently promised the opposite? Others will say it’s simply a sensible acknowledgement of reality: we cannot have our cake and eat it. Others say it’s both: politicians do indeed betray voters when they promise what they will not be able to deliver, but it is better ultimately to face reality than to pretend it doesn’t exist.
What’s your view? Is the warning that taxes will rise a betrayal of a promise or an acknowledgement of necessity? Is the government right to make increased spending on the NHS its priority? What do you think should happen to other spending, such as housing, the police and defence? If taxes have to rise, which should the Chancellor choose? And in the end, what do you think should be the priority of government: to fund its services adequately or to keep taxes as low as possible?
Let us know your views.