Before his budget last week, Jeremy Hunt said he knew voters could see through gimmicks. “And we are not going to do gimmicks on Wednesday”. Fast forward and what did the chancellor offer? A tax-cutting budget where taxes were still actually rising, and the promise of more funding for public services grounded in a £20bn austerity drive.
Having made very few new pledges that hadn’t been leaked to the media, the most attention-grabbing promise Hunt made was to declare an ambition to abolish employee national insurance – an unfunded commitment worth more than £40bn; equivalent to the annual transport budget.
Knowing that most people don’t like gimmicks, it should have been clear to the chancellor this would come across as snake oil on steroids. Managing the juggling act of tax cuts while improving public services and slashing government debt was already sounding a stretch. Now it appeared that the chancellor wasn’t serious at all about these things. There was a more important consideration: bribing Tory MPs. The Conservatives have gone from the party of fiscal responsibility to zero credibility.
At the heart of the chancellor’s ambition, which he later conceded was unlikely to happen soon, is a dishonesty baked into the Tory economic promise: that the party can offer the nation everything. It is offering European levels of public services with American levels of tax; a growing economy, and falling government debt.
Progress on each front is, however, clearly going backwards. And facing a general election the party is almost certain to lose, the Tories are desperately lurching from one policy idea to the next in search of an unlikely revival. Liz Truss was simply the most extreme version but Rishi Sunak’s government is playing the same discredited game.
Labour is cashing in, with a commanding lead in the opinion polls. But to a lesser extent, Keir Starmer is also making fast and loose economic promises. So far Labour has matched the Tories all the way down to the bottom of the barrel on tax cuts, without saying how it would improve the nation’s battered public services.
As Paul Johnson, the director of the Institute for Fiscal Studies, said last week, both parties are joined in the same “conspiracy of silence” in refusing to acknowledge the scale of the choices and trade-offs facing the nation.
Before a general election it might be tempting to promise the world, but it would be better to be honest. Both parties must grasp the nettle. Repairing public services will require higher taxes or borrowing. Deeper tax cuts would also mean driving up borrowing, or dismantling the state. The latter might appeal to a vocal and powerful libertarian minority. But opinion polls show that the former is increasingly popular.
For the Conservatives, it is a deep source of shame that tax levels as a share of the economy are set to reach 37.1% within the next five years, the highest level since 1948. But perhaps it is time instead to make the case that this is a tough but essentially unavoidable position.
While historically high, such levels are not wildly different from many other advanced economies. Tax-to-GDP levels in western Europe average about 40%, and almost 44% in Scandinavia. There are clear economic reasons why pressure is growing in Britain for these sorts of levels.
For most of the postwar era, public expenditure has bobbled about 40% of GDP. It fell during the 1980s under Margaret Thatcher, rose again under Tony Blair, then fell again in the post-2010 Tory austerity drive.
Having surged in the Covid pandemic to a postwar high of 53% of GDP, spending is expected to fall back again, but will remain higher than pre-pandemic levels. Again, in the context of other advanced economies, this is fairly middle of the pack, with the UK ranking behind higher tax-and-spend nations including France, Germany and Spain, but ahead of the US and Japan.
Underneath, a lot is going on. In particular for health and welfare, which includes pensions, where spending has risen from 25% of the total to almost 50%, fuelled by an ageing and increasingly unwell population.
Three things made these growing demands on public spending easier to accommodate in recent decades.
First, a steady decline in defence spending, which fell from about 6% of GDP to 2% as Britain dismantled its empire and after the fall of the Berlin Wall brought an end to the cold war.
Second, debt interest spending, which gradually fell as the nation’s stock of debt declined after the second world war. Although debt levels rose from the early 2000s, record low interest rates after the 2008 financial crisis helped limit the cost of servicing the nation’s debts.
The third is public investment, which has dropped from about 6% of GDP half a century ago to just under 2% at present. Cutting back on state housebuilding was a large part of that, while privatisations in the 1980s and 90s took some investment away from the government books.
Now, of course, each of these pressures have been thrown into reverse: growing geopolitical tensions are leading to demands for higher defence spending, debt costs have surged, while higher investment is required to fix Britain’s crumbling infrastructure and flatlining productivity growth.
“There is dishonesty really on both sides. Neither side has the incentive to be talking about this ahead of the election,” says Sir Charlie Bean, a former deputy governor of the Bank of England.
“The whole talk about tax cuts and stuff like that is actually not engaging with what is the real challenge, which is actually that there is more demand being placed on the state.
“You’ve either got to accept if you want reasonable public services, you have to pay the taxes. You can debate who pays the taxes, or you need a different view about what the state is going to provide.”
Frankly, whoever is in power will need to confront these challenges. Pre-election gimmicks are the last thing the nation needs.
