You will pay more tax (but politicians don’t want to talk about it)

I accused Giles Wilkes of going over to the dark side when he went to work as a Spad. He’s back now though and blogging at a frantic rate. Vince Cable’s loss is the blogosphere’s gain.

With the benefit of his recent spell in the corridors of power, and based on the statements so far from the main political parties, he has come up with this chart, summarising each party’s fiscal plans.

Screen Shot 2014-06-12 at 11.53.31

Assuming no change to taxes and, despite what politicians say, limited scope for cutting the welfare budget, the main cost of deficit reduction has to fall on public services (RDEL). There is nowhere else for it to go. All three parties are committed to eliminating the deficit. According to Giles, the main difference is that the Conservatives will cut fastest and reduce the deficit more quickly, Labour will cut more slowly and eliminate it later, while the Lib Dems are somewhere in between.

It’s worth reading Giles’s comments carefully.

My test of credibility, for now, is very crude. Pick an RDEL figure for 2018/19. Ask yourself whether it will be enough.

Under current/Conservative OBR plans there will be £24bn less to spend on resources than in 2015/16. Conservatives claim they will raise £12bn from benefits, but haven’t said how, and are also brewing up all sorts of tax promises, so that seems a reasonable starting point.

Now consider some non-negotiables. In 2015/16, the NHS and Education add up to £163bn. MoD and devolved regions add up to £73bn. If you assume that sheer demography and politics determine that the former two needs flat real settlements, that £163bn turns into £175bn or so for 2018/19. I think politics determines that the latter category requires flat cash ie. cannot provide cash cuts. So there are an extra £12bn of pressure from these areas.

So this leaves £36bn to find in terms of cash cuts, for all the other items of spending that add up to a mere £76bn in 2015/16.

Let’s just spell that out again. The Home Office, Justice, Local Communities, BIS, Defra, DECC – core government departments, which received about £100bn in cash terms in 2010/11, are already forecast to receive just £76bn in 2015/16 – and these fiscal plans imply that they will be forced to have just £40bn in 2018/19. That is really not credible! The idea that they can take even 10% real cuts in those next three years is highly fanciful.

£36 billion is slightly more than the figure the IFS came up with in February but it sounds about right.

So if the parties say they are not going to increase borrowing significantly (which they can’t if they are all eliminating the deficit) where will we find £36 billion from? As Giles says, the suggestion that this can come from public service cuts is fanciful.

At this point, someone usually starts on about how they took so much cost out of XYZ company, so it must be really easy to make the public sector more efficient without service cuts. But we are talking about massive numbers here, across an entire sector. Well, three entire sectors really. There is just no way these spending cuts can be achieved without a drop in services. If you still think you know how to do this, go and talk to George and Danny. I’m sure they’d give you a job.

After all that, then, the only other option is a hefty tax increase.

Here, we move from the La La Land Right of spending cuts to the La La Land Left of taxing the rich. “The rich will have to pay, they got us into this mess,” say some of my leftie friends, without realising that they are the rich, or, at least, the fairly well off.

The HMRC’s most recent estimates of tax revenues show just how detached from reality this is. Most taxes raise relatively small amounts. The three biggies are Income Tax, VAT and National Insurance. I have put the major contributors and their various rates on a chart, showing how much a 1 percent rise would deliver in 2015-16.

Tax Revenues

To achieve the same revenue as a penny on the basic rate, the higher rate (over £32,000) would need to rise by around 3.5p and the additional rate (over £150,000) by over 30p. Now bear in mind you have to raise £36 billion to avoid any more spending cuts and you start to see the problem. As the IFS said, the size of the hole is somewhere around an 8p basic income tax rise. Taxing the rich might sound like a great idea but there just aren’t enough of them. However the taxes are raised, we will all have to pay more.

Of course, it’s just as unlikely that taxes will increase by £36 billion as it is that public service spending will be cut by the amounts stated in the OBR report, or, for that matter, in the political parties’ projections. What we will get is something in between. Higher taxes, worse (but not collapsing) public services and maybe higher borrowing. The only difference between the parties will be the balance between the three.

But right now, nobody is talking about this. As Giles says:

No doubt this debate will continue to be evaded over the next few months. Some will claim tax rises; others will claim unspecified or unrealistic benefits cuts. Others will hope not to have to spell things out, and others will claim magic further efficiency savings.

And all will avoid the conversation for as long as possible. Giles reckons the Lib Dems’ plans are the most credible of them all (he would, wouldn’t he) but, at the moment, all the parties plans sound a bit vague and La La Landish to me.

Public Spending Venn 2015 - Plain-3 Update: Giles has already come back with a follow-up post. He just keeps cranking them out. This, from his time in government, is both interesting and worrying:

For my last few months I asked every friendly expert I could meet: do you think the figures in the latest OBR report that suggest there will be less than £300bn of RDEL spending in 2018 are credible and achievable? I never met anyone who would say yes. Mostly they looked on me as some sort of naif. I remain slightly confused at why the OBR itself doesn’t say this.

I could make a comment about emperors, small boys and clothes but that would just be too obvious, wouldn’t it?

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7 Responses to You will pay more tax (but politicians don’t want to talk about it)

  1. And yet all parties are going into the election promising income tax / NICs cuts of one sort or another. That will mean yet more tax increases or spending cuts elsewhere.

  2. Pingback: Bloodletting analogies or Don’t get Levels and Rates of Change confused | Freethinking Economist

  3. Dave Timoney says:

    You’re correct that the parties are being disingenuous, but the implication that we are in an intractable bind isn’t true. Your revenue-raising chart ignores the potential for new taxes (e.g. land value tax) and the contribution of local taxes (i.e. council band revaluation). The breakdown of stamp duty also obscures the extent to which this is comparable in total revenue-raising potential to biggies likes VAT, NICs and basic rate income tax.

    In short, the solution to the problem is a combination of dropping the commitment to eliminate the deficit by a set date (i.e. let the business cycle handle this over the medium-term) and a significant increase in taxes on property. The latter would also have the benefit of reducing the likelihood of a speculative bubble, thus avoiding adverse shocks to the business cycle, and (if allied with reform of offshore ownership) would help tackle tax avoidance.

    Our current paralysis is a product of 40 years of pro-property ideology.

    • Rick says:

      Dave, I didn’t get into LVT because it would have made the post too long. You are right, though, we need to look at other ways of raising tax. As you say, Land Tax would have a number of benefits. I looked at this in a post a couple of years ago.

      That said, even under LVT, most people would probably end up paying more tax than they do now. I’d be in favour of raising more of it on land than on income but it doesn’t get away from the point that most people will pay more tax, however we decide to raise it.

  4. bill40 says:

    Why can’t any politician just state the truth. There is no need to eliminate the deficit because they are normal. Our debt is historically low and the state is never financially constrained regardless of past budget outcomes. This inane obsession with household economics applied to a nation state must stop.
    The level of economic debate is appalling.

    • Yes. Thank you.

      Rick: I feel this article would be substantially improved by pointing out that reducing the deficit is a silly idea. I mean, everyone (or everyone who reads this sort of blog) already knows this, but it’s worth it just to be clear.

      (What will actually happen is that no politician with have the balls to raise taxes or cut services, and they’ll just borrow the money anyway. But I imagine a lot of vulnerable people will be prodded and bullied a fair bit along the way. C’est la vie.)

  5. Keith says:

    Bill is right, the economic non debate is shocking. How can we get a rational set of policies in the national interest if no one will talk honestly about the economy?

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