08 November 2019

Joe Marshall says that politicians should use this general election to set out proposals for much-needed changes to the tax system.

The early stages of the general election campaign have been awash with promises to increase spending and reform public services, with both parties pledging to introduce new fiscal rules to allow greater borrowing for investment. Tax, in contrast, has been given little space so far. In past elections politicians have often ruled out tax increases, or suggested that only faceless others – be it tax avoiders, the super-rich or big business – need to pay more. But what parties say about tax in their election manifestos will be important, and could pave the way to the tax changes the UK so desperately needs.

Parties should not rule out tax changes in a way they may come to regret

Ahead of recent elections, both Labour and the Conservatives have ruled out increases in some, or all, of the main taxes. Such promises are politically appealing: they make for a simple message on the doorstep and allow parties to fend off accusations that they would push up tax bills once in power.

But manifesto pledges can be politically and economically costly if they later prove unsustainable. Alistair Darling, the former chancellor, has described such promises as ‘nice electoral politics but economic madness’. His successor-but-one, Philip Hammond, discovered this to his cost in 2017 when he was forced to make an embarrassing U-turn after announcing an increase in the rate of National Insurance Contributions paid by the self-employed. The proposal was supported by economists and went some way to addressing the loss of tax revenues as people shifted from employment to self-employment, but it was viewed as a breach of a 2015 Conservative manifesto pledge and attracted criticism from across the political spectrum.

But it is becoming increasingly unviable for politicians to rule out tax changes. As the Institute for Government has previously highlighted, the combination of growing pressures on public spending, existing tax bases being undermined by technological and economic changes, and long-standing inefficiencies in the tax system present a fiscal challenge that any future government will have to address. To make the difficult trade-offs required, politicians will need to retain the flexibility to change tax policy and should not unnecessarily tie their hands.

Manifestos provide a unique opportunity to secure a mandate for reform 

There is little political incentive to start a meaningful debate about tax reform during an election campaign. It is hard to explain – but easy to misrepresent – to an electorate with only a limited understanding of the tax system. Significant changes are likely to create vocal and concentrated losers, while potential beneficiaries may be unaware of small individual gains. This means they are unlikely to be cheerleaders for change.

But any future government is likely to need to grapple with these issues if it is to sustainably fund the range of public spending promises that the manifestos are expected to set out. And a future government will find it easier to reform the tax system if it can draw on a clear mandate from the electorate. The election campaign, and the manifestos, provide an opportunity for the parties to start telling a compelling story about the benefits of change.

No one is well served by distortions that disincentivise valuable economic activity, add complexity and increase administration and compliance costs. In theory, removing some inefficiencies could even provide a ‘free lunch’, boosting economic growth and raising more revenue without having to increase headline rates – potentially a political win-win. And whatever their irrespective of their ideology, political parties should be able to find agreement over necessary improvements to the current system.

Thinking through tax policy before an election could help a new government hit the ground running

Opposition parties, who are not able to draw on the resources of the Treasury, will not be in a position to work up a full strategy for tax reform. But thinking through a broad approach and some specific measures can help a future government make the most of its period in office. Ensuring tax proposals are well-developed, work as a comprehensive package and are deliverable can help to ensure that a new government is ready to seek advice from officials and make progress on tax early in the next Parliament.

While the main political parties are offering strikingly different visions for the future of the country, tax change is likely to be on the agenda whoever ends up in power. This election, and the party manifestos, provide an opportunity to demonstrate serious thinking about the fiscal challenges ahead. If the opportunity is passed up, then whoever wins the election will have added to the challenge of being in government.