26 November 2019

With both main political parties having now set out their promises and positions on tax, Dr Gemma Tetlow questions a failure to spell out who will pay for their promises of improved public services.

Labour and the Conservatives are offering radically different options for the future of tax in the UK. But both are trying to persuade voters that they can benefit from wide-ranging public spending promises, without personally needing to pick up the tab.

The Conservatives and Labour have different visions for the size of the state

As in 2017, Jeremy Corbyn is offering the electorate a very different proposition on tax than the Conservatives. If elected, Labour plans to raise tax revenues by £83 billion a year (or more than 3% of national income). This would take government revenues to over 40% of national income, a level not seen in the UK since the early 1980s and is one which the UK has never sustained for a prolonged period – although it would not be abnormally high compared to other European countries.

The Conservatives, in contrast, are offering tax cuts – albeit more than are paid for by halting planned further cuts to corporation tax. They have said they will raise the point at which people start paying national insurance contributions (NICs) to £9,500 next year, with an “ultimate ambition” of raising it to £12,500 – although the latter pledge, which is far more costly, is conspicuously absent from their table of manifesto costings. The party has also pledged not to raise the rates of any of the three main taxes – income tax, NICs and VAT.

Labour’s tax policies, which focus on raising taxes remitted by companies, taxes on assets and taxes on higher income individuals, also mean that the balance of the UK tax system would change. The UK already raises a relatively large share of revenues from company profits and taxes on higher earners compared to international counterparts, but Labour’s proposals would push this even further.

Labour and Conservative manifestos promise that (most of) the public won’t pay for better public services

Despite the differences in their plans, Labour and the Conservatives have both used their manifestos to persuade the public that they can benefit from better quality public services without personally bearing the cost.

The Labour manifesto pushes the message that someone else – companies, the rich – will pay. Meanwhile, the Conservatives offer a world in which no one need pay more. In contrast, the Liberal Democrats have suggested raising all rates of income tax by 1p to help fund extra spending – signalling that many more people would be expected to contribute.

Labour has made a raft of new day-to-day spending pledges totalling £83 billion a year – in particular, increasing public spending on all stages of education and on social care. The manifesto says that only those with the “broadest shoulders” will pay more. But Labour’s tax proposals do not exclusively hit the rich and companies. Ultimately, taxes on companies must be paid by companies’ shareholders (including many ordinary UK pension savers), customers, employees or all three. A Labour govenment may also struggle to raise as much as it hopes from some of these tax measures, as the Institute for Fiscal Studies noted. If it cannot, the money will have to be found elsewhere, or the spending promises scaled back.

While the Conservatives’ manifesto does not contain anything like as many new spending pledges as Labour’s, it does play to voters’ desire for better public services: more nurses, more police officers, investment in education, and reaching net zero carbon emissions. The manifesto also promises “dignity and security” to those in need of social care, along with a promise that they will not have to sell their homes to pay for it. But the manifesto claims this vision is also consistent with pledging not to raise any of the main taxes and offering some tax cuts, while also adhering to new fiscal targets that allow the government to borrow only to invest. With the UK’s ageing population pushing up demand for health and social care and many services already struggling to deliver the quality of service voters expect, this is a balancing act that a Conservative government may not be able to sustain for long.

The manifestos tie hands over tax rises but at least there is a promise to review tax breaks

Labour has pledged not to raise the rates of income tax and NICs for those earning under £80,000 and not to raise VAT, while the Conservatives have gone further and also ruled out any increases in all three of the taxes.

This ties the next government’s hands in an undesirable way if it decides, for some reason, that it needs to raise revenues. It also limits the scope for making other sensible and much-needed reforms of the tax system – such as aligning the tax treatment of employees and the self-employed.

One positive sign in both parties’ manifestos is a pledge to review some existing tax breaks to judge whether they are delivering value for money. Labour has said it would review all corporate tax reliefs as well as entrepreneurs' relief, while the Conservatives have said they will review the latter.

As we have previously argued, there is currently too little scrutiny of tax reliefs and expenditures. It is welcome that both parties are considering reviewing some of these but they should go further.

The electorate has not been prepared for difficult choices about who pays for public services

Voters have a choice between very different plans for the UK tax system offered by the main parties, but most of them would be forgiven for thinking that – after the election – they will be able to enjoy improved public services without having to pay any more.  

The Conservative and Labour manifestos sidestep the painful choices that may have to be made between the quality and scope of services that the electorate wants and what people should pay for them. Should ministers raise that question at a later date, then the voters will have every right to say that they weren’t warned.