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David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the 2019 general election.
When asked about the proposal by Henry Dimbleby that a new Salt and Sugar Reformulation Tax should be introduced, the Prime Minister responded by saying that he is ‘not attracted to extra taxes on hard working people’.
At one level, this is what one might expect him to say, given his reluctance to be the bearer of bad news. But some have taken this to be not just a holding response to the publication of the National Food Strategy, but a firm determination to hold the line against tax rises. If so, there may be problems ahead.
It was only a few months ago that Rishi Sunak delivered a tax-raising Budget, with the freezing of allowances and thresholds in the personal tax system, plus a hefty increase in the rate of Corporation Tax (which, in the end, will be paid by people because all taxes are). These increases may well be sufficient to meet the Chancellor’s fiscal rules ,but only if he maintains the current spending plans.
This looks unlikely. To take just three examples, the cost of Covid catch-up, social care reform and net zero could easily cost £10 billion a year a piece. Add to that the cost of levelling up, plus the risks that debt interest payments could increase significantly, the Chancellor’s target of current expenditure being paid for by current revenue and debt falling as a proportion of GDP looks precarious.
It would be fair to say that the cause of spending control has been strengthened in recent days. The Government saw off attempts to block the cut in overseas aid more comfortably than expected, with Sunak very heavily involved in talking round potential rebels.
The temporary uplift in Universal Credit is looking like it will indeed be temporary (although this is likely to store up problems, I suspect) and the Chancellor has – to all intents and purposes – ruled out a huge increase in the state pension, which would happen if the triple lock was applied in the normal manner. On the latter point, this is entirely sensible and has been met with little opposition.
A month ago, there were complaints from the Treasury that the Prime Minister was going around making unfunded spending commitments but Boris Johnson appears to have been reined in. Big promises on climate change seem to have been deferred to the autumn, and a supposedly big speech on levelling up involved a spending commitment of just £50 milliom. Whereas most observers considered the Coventry address to be one of the least impressive set-piece Prime Ministerial speeches ever delivered, the Treasury would have considered it a triumph.
An announcement on social care reform is imminent, but this does look like it may be properly funded by additional taxes, suggesting that ‘not attracted to extra taxes’ does not mean ‘no extra taxes’ after all. It is reported that it is the Chancellor who is sceptical about the proposed policy, although I suspect this is driven by Treasury doubts about pursuing a Dilnot-style cap on social care costs (which benefits those with the largest estates most), rather than by an objection to the principle that new spending commitments have to be paid for.
For the first time in a while, the cause of fiscal conservatism – ensuring that public finances are sustainable – is gaining the upper hand. There are two reasons for this.
First, the Chesham & Amersham by-election has caused some nervousness. The fear within Government is that high spending is all very well, but a section of the Conservative voting electorate will draw the conclusion that they are the ones who will have to pay for it. It was striking that the Prime Minister spent much of his levelling-up speech saying that he does not want to make rich places poorer, which may come as a disappointment to parts of the Red Wall, but is clearly designed to reassure the South East.
The second reason why a more cautious approach to the public finances might be pursued is the apparent return of inflation. This may be transitory as we return to some kind of normality, and adjust to Brexit frictions and labour shortages, but it may not be. If it results in higher interest rates, the costs for the exchequer in funding our debt could rise very quickly – as the Office for Budget Responsibility has pointed out. An increase in interest rates of one per cent would add £21 billion to our debt interest bill. If our fiscal policy is considered to lack credibility, our problems could be worse.
There remains, however, the question of how the Conservative Party maintains the support of the new supporters it gained in 2019, whose views on tax and spend are much closer to those of the Labour Party than the traditional Conservatives. On spending on public services in general ,plus investment in their localities, they will want to see evidence of delivery.
Boris Johnson will be given the benefit of the doubt and, I suspect, be able to retain most of the Red Wall at the next general election but the pressure to spend money – not least from Red Wall MPs – will be considerable. The Treasury has won a few battles of late, but with a Prime Minister prone to change direction like a shopping trolley (as one prominent Westminster pundit likes to put it), he may be on the other side of the aisle before long.
There is also another reason for raising taxes, as well as funding public services. Tax can be used as a lever to change behaviour. The Prime Minister has declared that he is on a mission to reduce obesity, and it is hard to see how this could be done without using tax to change behaviour.
Ultimately, this may not mean consumers paying much of a price because producers reformulate their products (as happened with the Soft Drink Industry Levy) in order to prevent consumers facing higher prices. It was an effective way of using the price mechanism to achieve a Government objective, but it did mean legislating for a new tax.
A similar argument can be made for using taxes to help achieve net zero. If we want people to consume less carbon, the most efficient way to do this is to ensure that the cost of carbon is incorporated into the price of products by using a carbon tax. (By the way, those of us who value markets as a means of allocating resources should be instinctively more sympathetic to meeting environmental objectives by using the price mechanism where possible, rather than through regulation which can be cumbersome and ill-targeted.)
In both cases, tax increases, as a behavioural stick, may be required. They are also likely to be regressive, which may mean compensating mechanisms of some description which – in turn – will need to be paid for.
All of this means that extra taxes on hard working people may be necessary to deliver sound public finances and to meet other Government objectives, however unattractive the Prime Minister considers them to be.