December 14, 2015
On the 25th November, George Osborne, the UK’s Chancellor of the Exchequer, announced his spending plans for the next year. In common with many other European countries – and beyond – the UK is struggling to get its finances in order following the recent financial crisis. The government aims to close the gap between revenue and expenditure by the end of the current parliament in 2020. Of the various options available, the government has chosen to focus on reducing spending: austerity, in a word.
Mr Osborne appeared on BBC Radio 4’s Today programme the following morning. While he was answering questions about the details of his announcement, he said something along the lines of ‘if people want services, they have to be paid for’. I’d like to take a closer look at some of the implications of this apparently passing remark. I do not recall the normally aggressive Radio 4 interviewer picking up on it.
Instead of using spending cuts as the primary means of reducing the deficit, Mr Osborne could also have considered increasing more revenue through taxation of some form. This could be done either by simply raising taxes or by borrowing more for investment, in the expectation that growth would increase and, with it, tax revenue. After all, eliminating the deficit primarily through spending cuts has proved difficult and unpopular. The target date has slipped since the original goal of 2015, which was set in 2010. And the problem has been complicated by a decision to protect some major areas of expenditure, such as health care in the form of the National Health Service (NHS): the budget for 2015/16 is GBP 116.57 billion . Cuts to other budgets must therefore be significant to compensate.
While efficiency savings can be made, there is a limit beyond which further cuts will result in reduced services. Mr Osborne’s passing remark aside, I have not noticed any straightforward statement from the UK government that we will need to pay more if we want the services, either public or private. In fact, governments in the UK and beyond seem reluctant to mention the word tax.
The evidence that people would be willing to pay more for services such as health care is mixed . I suspect many more people would be happy to see an increase in taxation as long as it was someone else’s tax, not theirs. Who or what could be the source of this extra tax revenue?
One potential source is to close the so-called tax gap, the difference between the tax revenue collected and that which should have been collected. This is not easy to measure, but HMRC (Her Majesty’s Revenue and Customs) in the UK  estimates it to be GBP 34 billion, or 6.4% of tax liabilities. Closing the gap in the UK may not be easy. It is currently at the low end of gaps internationally and would take quite a bit of effort to reduce. Other countries have a bigger gap, in southern Europe for instance, so reducing it there may be more necessary.
Another popular source of tax revenue is ‘the rich’. It is not clear who is included in this group. The top 1% of income earners in the UK currently pay over 25% of all income tax, while the top 10% pay over half . A significant increase in tax revenue would require a substantially higher amount from the top 1% and even from the top 10%.
Corporation tax is of course another potential source of revenue from somewhere else. At present in the UK, it contributes under 10% of tax revenue. There has been a lot of publicity about the small amounts of tax paid by companies such as Amazon, Facebook and Google. They and others are in my view legitimate targets but international agreements are necessary if attempts to gather more tax are to be effective.
I see little alternative to telling people honestly that taxes will have to increase or other arrangements made to pay for services – health insurance for instance. The statement should be accompanied by an explanation as to why and how much for each class of service. And tax increases, or alternatives, cannot be confined to a very small section of population or some other group. The load will need to be spread more widely, but avoiding the worst-off. After all, income tax rates for a lot of the time after 1945 were much higher than they are now. In the mid to late 1970s, the base rate in the UK was over 30%, reaching 35% at one point, with a peak marginal rate of 83%. The base rate is currently 20%, with a peak rate of 45% for taxable income over GBP 150,000.
Whether or not we will see this kind of honesty is open to question. The public would of course have to respond but I suspect that the direct approach might go down well.
Notes and sources
- See http://www.nhsconfed.org/resources/key-statistics-on-the-nhs
- For example, a YouGov survey showed that just 24% would be willing to pay something towards the cost of a visit to their doctor. See https://yougov.co.uk/news/2015/10/22/one-four-would-pay-see-gp/ .
- Measuring tax gaps 2015 edition: Tax gap estimates for 2013-14. See https://www.gov.uk/…data/…/HMRC-measuring-tax-gaps-2015-1.pdf
- Income tax Liabilities Statistics 2012-13 to 2014-15. See https://www.gov.uk/government/collections/income-tax-statistics-and-distributions.