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Here is an economic forecast. There will be no credible low-tax option for British voters at the next election. Whatever leaders might say, there is no near-term strategy that reduces the rising tax burden.
This is not the impression either of the two parties with a chance of forming the next government (for argument’s sake I include the Conservatives) wish to convey. Both insist taxes are too high and that public spending is unsustainable. The Conservatives may dream of following their trusted playbook of promising a tax-cutting agenda. There may even be a “downpayment” before the election, though not enough of one to cancel out other increases.
Labour, determined to prove it can be trusted with the economy, will broadly commit to sticking with Tory tax policies in its early years aside from a few small measures, knowing that those plans see the tax burden continuing to rise, to 37.7 per cent of gross domestic product, by 2027/8.
Both will talk of refashioning the economy and promise future growth. Yet neither will make meaningful inroads into the tax burden until the last years of the next parliament at the earliest.
Historically, parties have tussled over how to balance the proceeds of growth between spending and tax cuts. The next government will not have that luxury. The best either side can realistically offer is a spurt of reform which leads to higher growth and facilitates happier choices. And while some reforms to power growth can cost little — to the planning process for example — others require upfront investment and are unpopular. Even with a large majority, Tories ran scared of planning reform.
Conservatives may plausibly argue taxes will be lower under them than Labour. Yet whatever tactics are deployed before the election, the pressure on tax revenues will not abate after it.
Alongside the UK’s stubbornly low growth are serious revenue challenges highlighted in this month’s Office for Budget Responsibility’s fiscal risks report. Most immediately troubling is the UK’s exposure to costs which spring from its high levels of debt. The risk is not only less favourable market sentiment but the rising cost of servicing that debt. Interest payments were £9.8bn in April alone, though inflation also boosts tax receipts. Rishi Sunak will want to restore the goal of paring back a debt ratio which stands at 100 per cent of GDP.
Other issues include an ageing society which places a higher tax burden on relatively fewer working shoulders. The UK is locked into rising welfare commitments to pensioners, via the triple lock income guarantee from which neither party feels able to retreat. The OBR states that this, alongside the loss of fuel duty revenue with the switch to electric vehicles, the costs of decarbonisation and pledges to raise defence spending, will represent a £66bn challenge by 2030.
The need to contain debt means tax cuts require spending reductions but Tories have lost their taste for serious retrenchment. In the short term, spending cuts may be a greater risk to growth than high taxes. Until trend growth is reliably over two per cent there is little room for manoeuvre.
Tory tax rises will continue to bite until 2027/8. The Institute for Fiscal Studies describes Sunak’s freezing of income tax thresholds for six years as “the single biggest tax-raising measure since the 1970s”. By 2028, around 14 per cent of UK taxpayers will be higher-rate taxpayers, compared to 3.5 per cent in 1991/2.
With decent growth, a long-term Tory tax-cutting agenda becomes viable. But the state of public infrastructure, the desire to cut debt, raise public sector pay with reduced immigration, meet climate targets and the cost of upfront investment to power reforms preclude anything but a steady or rising tax burden till then.
Labour sees a reputation for economic prudence as the key to Downing Street’s door. There must be no unfunded pledges. Keir Starmer’s current fight with the Labour left over his refusal to commit to reversing the two-child cap on welfare payments serves the purpose of demonstrating his fiscal rectitude and readiness for hard choices. But few Labour figures believe it is a sustainable position in power and even fewer think his commitment to reform is an alternative to spending more. In a recent article, Starmer wrote that Britain requires reform “rather than just more money”, a phrase which does not actually preclude extra spending.
Assuming both parties again commit to not increasing the rates of income tax, VAT and National Insurance, Labour will be forced to seek its extra funding elsewhere. Potential targets include taxes on assets or investments and the removal of higher rate reliefs. It does not take a seer to imagine a new Labour chancellor sorrowfully declaring that having looked at the books, she has discovered things are worse than expected.
Come the election, then, voters will find two parties denouncing high taxes but with no immediate expectation of addressing them. Tories will talk up major savings they cannot deliver; Labour will stress reform that comes without extra costs.
It would be nice to think the parties could be honest about what awaits. But voters have rarely rewarded honesty when it comes to taxation.
