Rishi Sunak and the politics of taxation

Michael Jacobs - Professorial Fellow and Head of Engagement and Impact, SPERI

In her very first budget after being elected in 1979, Thatcher cut the basic rate of income tax from 33p to 30p, and the top rate from 83% to 60%. In three successive budgets from 1986-88 she cut the basic rate again, down to 25%, while the top rate was slashed to 40%. ‘Our aim is to make tax collecting a declining industry’, she declared.

But Margaret Thatcher did not reduce taxes, despite her own claims and those of her followers. The overall share of taxation as a proportion of GDP initially rose during Thatcher’s period in office, and then came down to just above where it had started (around 30%) in 1979. How did Thatcher achieve this trick, of cutting income tax while leaving the total tax share unchanged? By raising other tax rates – most notably VAT, which she virtually doubled, from 8% to 15%. 

But if she was not a successful tax-cutter, Thatcher was certainly a great propagandist, and her claims to have reduced taxes generated a new law of British politics. Voters want their income tax rates reduced, but apparently don’t notice when other taxes rise at the same time. 

This seeming political truth dominated the politics of the following decade. In the 1992 election, when Labour proposed to raise the higher income tax band to 50% and abolish the upper earnings limit on national insurance contributions – measures which, together with a raising of the personal allowance, would have made eight out of ten taxpayers better off – they were mercilessly attacked by the Conservatives. The Tory poster announcing ‘Labour’s tax bombshell’ has gone down in history as one of the most influential ever. Having begun the campaign with a healthy polling lead, Labour lost the election badly.

The lesson was not lost on Tony Blair and Gordon Brown. In defining ‘New Labour’, they made a central pledge that lasted from the 1997 manifesto all the way through to 2010’s. Labour, they promised, would not increase the basic or the higher rate of income tax. On the contrary, Brown took to emulating Thatcher himself, reducing the basic rate from 23% to 20% by 2007 and even introducing a new starter rate of 10%.

Yet at the same time New Labour needed more money to finance its major increase in spending on the NHS, education and other public services. So Brown raised other taxes. One of these was actually popular, when in 2002 he raised the rate of national insurance contributions by 1p to fund an increase in health spending. In other budgets Brown raised income tax thresholds by less than the rate of earnings growth, increased fuel duty and raised a number of other taxes. Somewhat brazenly, given Thatcher’s example, the Tories and right-leaning newspapers accused Brown of ‘stealth taxation’. Indeed this became such a commonplace of political commentary that it became untrue: a chancellor can hardly be famous for his stealth taxes.

By these means Brown succeeded in raising the share of taxation in GDP to around 34%, somewhat closer to, but still far less than, the European average of around 40%. Reduced slightly by Osborne during the years of austerity, the UK tax share is now due to reach 36% in 2024.

It would be nice to think that the widespread opprobrium heaped upon the spring statement might finally bring the era of income tax mythology to an end. For the unfortunate truth is that British taxes are still much too low. There is a reason that most European countries pay more in tax than we do in the UK. It is because they have better public services. 

In a 21st century society 36% of GDP does not buy you the health, education, policing and pensions – let alone the net zero, levelling up and defence expenditure – that modern citizens expect. Over the last 20 years successive chancellors have sought to overcome this fact through a variety of means: privatisations and other state asset sales; a huge reduction in defence spending; and austerity. But those strategies have now run out. 

And this problem is only going to get worse. As our population ages, the demands on the NHS, social care and pensions are rising, and the number of taxpayers who can pay for them is falling. As the Office for Budget Responsibility has been pointing out for some time, a huge ‘fiscal gap’ is opening up over the coming decade, as necessary spending exceeds tax receipts.

It is said that generals always plan to fight the last war. Sunak and Johnson seem to wish to fight the tax battles of 40 years ago. It is time for our politicians to address the future.