The next UK government will have to raise taxes. In fact, the current UK government is already raising taxes quite substantially. Despite the headline tax cuts in Jeremy Hunt’s Autumn Statement, taxes are set to rise to almost 38% of GDP, the highest level on record. The OBR’s chart below has the details, showing how the 2019 government has already raised taxes from 33% to 36% of GDP.
But even if the nation’s tax take does hit this record level, it’s unlikely to be enough. Britain’s public services are crumbling, and are not set for any respite. As economists Giles Wilkes and Ian Mulherin have astutely pointed out, much of the headroom for the Chancellor’s tax cuts actually came from hidden cuts to public services. Inflation has been higher than expected, and departmental budgets have been kept fixed in cash terms — which means painful real terms cuts, and trading off pay rises for public servants against reducing service levels.
Unless they are happy to run on a platform of stopping government from doing things — and I highly doubt there is any route to electoral success that involves dialling down the NHS, pensions or similar — politicians need to make the case for higher taxes. My argument in this piece is that, rather than presenting taxes as a necessary evil, politicians should aim to make a more positive case for taxes. That means talking up the benefits people get from taxes, and making the case that paying a bit more in tax can improve people’s lives more than leaving the money in their pocket.
The problem the UK faces with higher taxes and crumbling public services is easy to break down. First, the economy has barely grown since 2007, which means little increase in tax income or in GDP to spread the tax burden across. Second, the underlying pressure on public services has increased overtime, driven primarily by an ageing population. The IFS projects that public spending will need to rise above 45% of GDP in the 2040s to accommodate this. Third, public sector productivity has not grown substantially, and has been largely flat since well before the slowdown in productivity across the rest of the economy took hold. With these three constraints in place, you are left with a choice between cutting back public services or raising taxes to pay for public services.
Of course, it is possible to target one or more of the triad of problems. You could (and should) try to raise the UK’s growth rate, to relieve the pressure on taxes. But raising growth rates is a slow, difficult process, and not always within the state’s control. Higher growth is something governments should aim for but not bank on. You could also try to reduce the UK’s demographic pressures by encouraging inward migration of working age people, although that brings its own political and transitional challenges.
You could (and should) also try to raise public sector productivity, to achieve more public service with less public spending. But this, too, is hard to do and requires upfront investment.
In my view, while it’s good to try everything that might reduce the tax burden in future, there is no escaping the need for higher taxes. Any other approach risks either being wishful thinking or involve an unpopular dismantling of the state.
The problem is: people don’t like paying taxes. People want and expect better pubic services, and they want other people to pay more tax, but they don’t want to pay more themselves. This helps to explain why politicians so often reach for taxes that don’t affect most people (crackdowns on tax avoidance anyone?) or that people don’t notice (the freezing of income tax thresholds is a classic of the stealth tax genre).
The main reason people don’t like paying tax is obvious: it takes away money they would otherwise be able to spend. In a time of high energy bills, rising mortgage payments and general price increases, this is especially painful. But there is perhaps another factor at work: people don’t necessarily see where there money goes, or understand the range of things it is spent on. Paying taxes where the benefit is unseen or taken for granted is hardly likely to be popular.
So how could you go about making these benefits more visible, making a positive case for tax? I think there are four places to look.
First, try to actually make public services better over time, so that they visibly improve people’s lives. One feature of Britain’s public services today is that they seem to be getting worse even as they cost more. This is partly a result of demographic pressure, but it is also a result of underinvestment. Before the 2010 election, David Cameron promised to tackle “causes rather than symptoms”, but his government and its successors have arguably tipped the balance even further towards tackling symptoms. So much public spending now feels like it is papering over cracks rather than improving services.
There are many factors reinforcing this. The UK has four times fewer MRI and CT scanners than Germany, Italy and Greece, reducing the effectiveness of our health service. Local authority social care funding is in crisis, putting more pressure on NHS beds. Increasing rents and a reluctance to build new social housing have sent the housing benefit bill soaring. Inadequate mental health services help keep more people out of work — not to mention the impact collapsing children’s services may have on the future workforce. This list could go on at length, but the implication is clear: by failing to invest in public services, we can end up spending more money for worse services.
The positive case for public services should revolve around actually improving services, not just keeping a lid on them. Invest in buildings, technology, equipment. Fund the worst affected services, especially in local government. There is no immediate free lunch here — it would require more spending, and the payoff may take a long time to come — but it would at least mean throwing good money after good.
Second, restore the idea that the welfare safety net is for everyone. Welfare makes up a big chunk of public spending, but it tends to go towards people who currently pay less in tax. But this is not a permanent state of affairs — the safety net is meant to be there for everyone, protecting against misfortunes like worklessness or ill health, and supporting the good fortune of retirement. Just because you don’t need it now doesn’t mean you don’t need it.
The idea that the money people “pay in” to National Insurance and get benefits in return is false, but it is nonetheless popular. People like the idea that they contribute to the welfare system and they will get something back. In recent years, support for welfare has been eroded, by efforts to demonise and reduce working age benefits, and by a belief that state pensions will be unsustainable by the time today’s working age people retire. Neither of these are necessary. With higher taxes and a commitment to the welfare state being for everyone, it should be possible to guarantee a safety net and pensions into the future.
Third, use state action to save people money. Many of the services which take up a big share of people’s income — energy, water, transport, broadband, childcare and so on — are heavily influenced by the state. Housing costs could also be added to this category. Regulation, consumer protection and planning are not very costly parts of the state, but they can save or cost people a lot of money depending on how well they’re done. Politicians should invest properly in them — in a way they have not in the past — and aim to save people money. The scope for reducing energy bills — by shifting away from gas to renewable energy — and housing costs — by increasing supply and reforming markets — are also particularly big opportunities for the UK state to grasp at present.
Fourth, and most importantly, appeal to people’s values. Invite people to consider what they most value, what will make their lives better. For most, aspirations such as a longer healthy life expectancy, better education for their children, a better environment are likely to come to the fore. Many of these values and aspirations are things that the state plays a central role in providing.
The experience of the USA, which affords its citizens much higher incomes but seems to lag on some key life outcomes, may be instructive here. Aside from better housing (something the UK should copy!), it is not obvious what Americans get for their far higher income. They spend most of the extra income on health (for worse outcomes), on cars and on financial and legal services.
The case that politicians can make, in my view, is that better government and better public services is a route to the good life. It is not easy to take money out of people’s pockets, but it might be a little easier if you can tell them a story about what they — or their children — will get in return.