Peter Bye

In December 2015, I posted a blog looking at how services are funded[1]. I’d like to revisit the subject in the context of the promises being made by the major parties in the UK’s general election, due to take place on 12th December. This piece aims to bring the 2015 blog up to date.

Shortly after his 25th November 2015 spending plans announcement, George Osborne, the UK’s Chancellor of the Exchequer at the time, was interviewed on BBC’s Today programme. In answering questions about his plans, he said something along the lines of ‘if people want services, they have to be paid for’. That passing remark seems to me to be of significance today in the light of the various austerity-busting promises being made at present by the major parties.

Apart from plans for big infrastructure spending[2], the two main parties are making promises to spend a great deal more than at present on services, including healthcare through the NHS, social care and law enforcement. The Labour Party is even promising to offer free fibre broadband to every household, in what amounts to broadband as a service. It plans to do that by taking part of British Telecom into public ownership. A number of other companies such as rail and water are also targets for nationalisation. All this will require a lot of money[3].

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 revenue?

It could of course come from borrowing, which is fine for capital investment, for example for transport and other infrastructure. But spending on services can lead to ever-increasing deficits if funded by borrowing; more sustainable sources of revenue are required – taxation of some form, in other words.

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 5.6% of tax liabilities for the year 2017-18, down from 7.2% since 2005 to 2006.[4] Closing the gap in the UK may not be easy. It is currently at the low end of gaps internationally[5] and would take quite a bit of effort to reduce.

Another popular source of revenue is ‘the rich’. It is not always clear who is included in this group. The top 1% of income earners in the UK currently pay about 27% of all income tax, while the top 10% pay over half. A significant increase in income tax revenue would require a substantially higher amount from the top 1% and even from the top 10%. The Labour Party has stated that it would increase income tax on the top 5%, that is, those earning over £80,000 per annum, but plans no increases for others, although it is scrapping the Married Couple’s Allowance. The Conservative Party has promised no rate changes to income tax, National Insurance and VAT, which together make up nearly two thirds of tax. The Liberal Democrats have said that they will raise income tax rates to cover the extra costs of the NHS and social care.

Corporation tax is of course another potential source of revenue. At present in the UK, it contributes about 8% of tax revenue, although business also pays other taxes, on property for instance. 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. The Labour Party has promised to raise more revenue from taxes on the digital giants.

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 I do not believe tax increases can 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 £150,000.

Whether or not we will see this kind of honesty is open to question. In my view, leadership in a democracy consists in informing the public about what is necessary and why, even if it’s unpleasant. The public would of course have to respond but I suspect that the honest approach might go down well.

Notes and sources

[1] Who pays for services? Can be found at https://peterbye.blogactiv.eu/2015/12/

[2] The spending plans of the parties are stated in their manifestos, which can be found on the party websites: Conservative https://vote.conservatives.com/our-plan , Labour https://labour.org.uk/manifesto/ Liberal Democrat https://www.libdems.org.uk/plan

[3] Information on UK tax, its sources and who pays how much can be found at https://www.ifs.org.uk/publications/9178

[4] For details, see https://www.gov.uk/government/news/tax-gap-remains-low

[5] See, for example https://ec.europa.eu/search/?QueryText=tax+gaps&op=Search&swlang=en&form_build_id=form-IHKhtmA8uTl_ubcxjal8xjd65 U4OOr9CNkl96C W55IU&form_id=nexteuropa_europa_search_search_form

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