We must pay more tax, or be complicit in the slow death of public services

https://www.theguardian.com/commentisfree/2017/mar/16/tax-public-services-philip-hammond

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Yesterday the chancellor abruptly U-turned on a planned rise in national insurance contributions (NICs) for the self-employed. The proposed change was a sensible move. It was a progressive rise in tax – no one earning under £16,000 would have been affected, and most of the money raised came from the top 20% of earners – and was a step in the right direction of responding to changing patterns of employment. The sudden reversal does leave the budget with a £2bn hole, but in the context of the public finances this is merely a rounding error. However, it raises bigger questions for our political system and our ability to raise taxes.

Back in the 1960s and 1970s tax receipts averaged around 38% of national income, but after a large drop in the 1980s they have bounced around the 34% to 36% mark ever since. A GDP decline of 2%-4% in the tax take might not sound like much but in the context of a government deficit that has averaged around 3% since 1980, it is highly significant.

The long-term picture of the UK is of a decline in the tax take and big shift within that take. VAT was introduced in 1973 at 10%, at time when the basic rate of income tax was 30%. Forty years on, both stand at 20%. Corporation tax will have fallen from more than 50% in the 1970s to 17% by 2020 – a figure well below the global average.

Despite all the rhetoric on the pressing need for deficit reduction, since 2010 the burden has fallen mainly on the spending side of the ledger. Current tax receipts stood at 36.4% of the economy in 2010-11 and by 2015-16 had fallen to 36.2%. Meanwhile, government spending as a proportion of the economy was cut from 44.9% to 40%.

Both the coalition government and the Conservative majority that succeeded it committed themselves to large – and expensive – tax cuts. The increase in the personal allowance, the raising of the threshold for paying the higher rate, freezes in fuel duty and corporation tax cuts will cost £45bn a year by 2020-21 (relative to where those rates were in 2010). To give some context to those figures: £45bn is almost three times the size of the expected deficit in that year or, more starkly, around three times the size of the planned welfare cuts.

Not since 1992 has one of the major political parties felt able to commit itself openly at an election to raising one of the major taxes – the basic and higher rate of income tax, NICs or VAT. Indeed in 2015 the Conservatives went one step further and ruled out raising any of these taxes in this parliament – a pledge that came back to bite the chancellor this week.

As our population ages in the 2020s the pressures for more spending on health, social care and pensions will rise. The choice before Britain is clear – either we find a way to grow our revenues and expand our tax base or the state will simply have to withdraw from some areas of activity. We will be left with a much smaller state far more focused on the needs of older people.

The government’s inability to stand firm in the face of media pressure on even a small rise in direct taxation doesn’t bode well. In the past few decades only Gordon Brown’s increase in NICs in the early 2000s – a pledge explicitly linked to the NHS – has received broad public support. And at a time when living standards have gone through an unprecedented squeeze, making the case that middle earners – as well as higher earners – may need to pay more is far from straightforward.

But with public spending pressures rising and the stock of public debt at the highest it has been in decades, the choices before politicians are becoming starker: find a way to increase revenues or face the collapse of some public services.