Hanging on the wall behind Rishi Sunak’s desk in Number 11 Downing Street is a photo of Nigel Lawson, who ran the UK’s finances between 1983 and 1989. Glowering down on the chancellor, it provides ideological inspiration for his moral mission to be a low-tax Conservative.
With the tax burden set to rise from 32.9 per cent of national income in 2019-20 to 36 per cent in 2024-25, the equivalent of a £3,000 a year tax increase for every household, Sunak’s ambition to be a tax cutting chancellor, let alone a low-tax Conservative, might appear ridiculous. Nonetheless the comparison with Lawson raises some interesting questions. What does low taxation mean in practice? And what is possible for Sunak to achieve?
The obvious place to start examining the first question is Lawson’s 1988 Budget. Shortly after Margaret Thatcher’s third election victory, amid rapid economic growth and with a clarity of expression that Sunak would do well to imitate, Lawson cemented his low-tax credentials by cutting the basic rate of income tax by 2 percentage points and sweeping away four higher rates of income tax, leaving the top rate charged at 40 per cent.
Conservative MPs and bankers in the City of London greeted the 1988 Budget with delight. But there was uproar in the House of Commons, where a young Alex Salmond, soon to become Scottish National Party leader, was expelled from the chamber.
Despite these huge tax cuts, Lawson had to admit that he had a problem with one tax statistic. “It will not be possible in this Budget to reduce the burden of taxation,” he said. The Budget documents spelt this out. Total taxes as a proportion of national income remained stable in 1988-89 at 37.9 per cent.
Since most Financial Times readers are eagle-eyed, I am sure you will have noticed two notable features in this retelling of history. First, that it is perfectly possible to earn a reputation as a low-tax Conservative chancellor without cutting the tax burden. And second, that at 37.9 per cent, the 1988-89 share of tax in national income is a figure higher than Sunak’s 36 per cent for 2024-25, which we have been told will be the highest in 70 years.
The way to reconcile these seemingly contradictory statements is to understand that, in the intervening 30 years, the denominator in the tax burden statistic — that is to say, the UK’s gross domestic product — has been revised close to 20 per cent higher.
This has lowered the historic tax burden considerably from what we thought it to be at the time. Contemporary data estimates the 1988-89 tax burden at only 30.7 per cent, demonstrating how unwise it is to use this statistic as an infallible indicator of the size of the state in people’s lives.
It follows that Sunak might well want to look at other measures of taxation in order to claim the tax-cutting mantle. Lawson’s favourite tactic was to nod to Arthur Laffer and suggest that his income tax cuts were so successful at boosting the UK’s economic performance that he could not stop revenues pouring into the exchequer. Sunak will struggle to emulate this tactic, given that the medium-term UK growth outlook is sluggish.
But that does not mean all is lost for the current chancellor. The basic rate of income tax is now 20 per cent, 5 percentage points lower than the rate bequeathed by Lawson. With some judicious tax cutting before the next general election, due by 2024, Sunak might hope to present himself with greater credibility as a low-tax Conservative.
The trouble is that if he goes down this path, he will quickly come up against the truth-tellers at the Institute for Fiscal Studies, who will note that even if the basic rate of income tax is now lower, other taxes on income are set to be much higher than they were in the late 1980s. The main employee NICs rate has risen from 9 per cent then to 13.25 per cent next April, with the core employer rate going up from 10 per cent to 14.05 per cent.
Even within income tax, a closer look at the parameters of the system shows that its bite is now deeper, especially for the well off. In 2021-22, people become higher rate taxpayers when their annual income rises above £50,270. In today’s prices, the 1988-89 equivalent higher rate threshold would be £68,560.
It is no wonder HM Revenue & Customs estimates that in 2021-22 there will be over 4.6m people who pay a higher rate of income tax, compared with only 1.3m in 1988-89. On top of this, higher rate taxpayers also now start losing their personal allowance when their incomes rise above £100,000. They will have less pension tax relief after total income reaches £150,000 as well as paying a 45 per cent rate.
Sunak is fully entitled to keep the Lawson photograph on the wall behind him, reminding him of his ambition to be a low-tax chancellor. But with the elderly having legitimate demands for decent public services and a rapidly ageing population, he has precious little chance of success on this front, whatever measure he uses.
A fair wind might enable some pre-election tax cuts, but if we still want reasonable public services, we are going to have to pay more for them in the future. In taxation, demographics is destiny.
Success for this chancellor must therefore be determined by something other than the level of taxes. If Sunak succeeds in steering the economy through a terrible pandemic and towards a brighter future, he will fully deserve a place in history among revered Conservative chancellors.
You never know, in 30 years’ time, he might be staring down from the wall upon one of his successors.
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