Sunday, May 28, 2017
Taxes are going up, whoever wins the election
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

There are only 11 days to go until the general election and there is still a lot we do not know. That is even on the assumption that we see the Conservative party returned with a larger majority, which remains the most likely outcome despite narrowing polls.

We do not know for sure whether Philip Hammond will be kept in his post as chancellor, Theresa May having so far refused to guarantee his position after reported bust-ups between 10 and 11 Downing Street.

When Hammond presented the budget in March he was happy to describe it as his first and last spring budget. What he meant, of course, was that the spring budget is being abolished but that he would be around for plenty of autumn budgets. Now that is not so certain.

I hope for his sake he is kept in the job. By the time of the election he will have been at the Treasury for 11 months. Most recent chancellors have been long-serving ones, including more than six years for George Osborne and 10 for Gordon Brown. The last short-stayer was John Major in 1989-90, 13 months, though his consolation was being promoted to prime minister.

Personnel uncertainties are one thing, policy uncertainties for the Tories another. A week ago I wrote here that the Conservative policy on social care were messy, incoherent and unfair and “will need to be revisited”. I did not expect them to be revisited, in a tyre-screeching U-turn by the prime minister, the very next day.

For the Tories too, things are more uncertain than they should be on tax. An Ipsos-Mori poll the other day showed that 54% of people expect income tax to rise in the event of a Conservative victory, not that much below the 70% who think it would happen under Labour.

Labour, it should be noted, has said explicitly that it would put up income tax, though only on incomes of £80,000 and above. But for more than half of people to think income tax will rise under the Tories is quite something. The most explicit tax pledge in a not very explicit manifesto was to cut income tax by raising the personal allowance, currently £11,500, to £12,500, and the higher rate threshold from £45,000 to £50,000.

This tells me two things. One is that for all the emphasis in recent years on raising the personal allowance – “taking people out of tax” – many people do not regard this as a tax cut in the way they would a reduction in the tax rate.
The other point is that even if people have got it wrong on the Tories and income tax, they are right to suspect that taxes will be going up in coming years.

There is the cynical argument that governments tend to raise taxes once elections are safely out of the way. There is the fact that the Tories have sensibly abandoned their 2015 pledge not to raise any of the main taxes – VAT, income tax, corporation tax and national insurance – in the next parliament, replaced by a weaker promise to keep taxes “as low as possible”.

And there is the fact that the public finances need higher taxes. Figures last week showed that the public finances got off to a bad start to the new fiscal year in April. Public borrowing for the month of £10.4bn was £1.2bn up on a year earlier, consistent with the rise in borrowing the Office for Budget Responsibility (OBR) expects this year.

Official projections for government receipts show that they are on course to rise by the end of the decade to their highest level as a percentage of gross domestic product since 1986-7, as the Institute for Fiscal Studies pointed out on Friday. Taking only the tax component of those receipts, the IFS also pointed out that they are on course to hit their highest level of GDP since 1969-70.

Some of the sources of this growth in tax receipts are known about but are only just taking effect or have yet to do so. They include the apprenticeship levy, which will raise £3bn a year form this year, the increase in insurance premium tax which will push up receipts by more than 50%, and the cut in the dividend tax allowance from £5,000 to £2,000 next year.

Some it, however, is so far uncosted, or relies on “fiscal drag” from rising incomes. The latest growth figures, revised down to just 0.2% in the first quarter as a result of the squeeze on household real incomes, suggests that revenue growth from this source may be hard to achieve. Weaker-than-expected growth, if maintained, will mean more government borrowing.

The pledge to raise the personal allowance to £12,500 and the higher rate threshold to £50,000, which will cost around £2bn a year in lost income tax revenues, is not included in the figures. That money will have to be found from somewhere.

We know that Hammond, if back in the Treasury, will want to revisit the 2% increase in Class 4 national insurance contributions for the self-employed he announced in his March budget. He was forced to abandon it before the ink was dry because it broke a 2015 manifesto commitment, and which has left him £500m a year short.

It may be brought back as part of a package which will include enhanced rights for the self-employed, to be recommended by the review undertake by Matthew Taylor. Those enhanced rights will not go down well with some firms, and nor will an increase in Class 4 contributions with the self-employed.

I should put the Tories’ tax plans, and their softer pledge to keep taxes as low as possible, in perspective. They will not, this time, raise VAT after the election, as in 1979 and 2010. Income tax, as I say, is going down not up. Corporation tax will be reduced from its current 19% to 17%.

All that can be contrasted with Labour, which wants to soak the £80,000 a year plus rich with a hike in income tax, increase corporation tax to 26% and hit the City with a transactions tax. The Liberal Democrats are also explicit about their plan to put 1p in the pound on income tax across all earnings levels.

In relative terms, the Tories clearly are the lower tax party, though have been quieter than you might expect in attacking Labour’s plans for raising taxes on higher earners, business and the City. That may reflect another set of poll findings, which is that these things are worryingly popular with voters.

We know, however, that this election will not mark the end of austerity. The public finances are still a long way from being fixed. The Tories may not be aiming to balance the budget until the mid-2020s but even that will require the restraint on spending to be maintained. Even harder hit than wage-earners during the coming squeeze will be those reliant on benefits and tax credits frozen in cash terms.

We also know that when it comes to taxation, it is mainly a question of degree. The Tories will raise tax reluctantly, and by less than their opponents. Labour will do it with gusto, while pledging no new taxes for the majority. But taxes are going up, whoever wins the election on June 8.