Why Britain Needs to Tax and Spend

Britain’s attitude to tax must change if it is to adapt to the 21st century’s pressures

Truss, Low Tax and The Changing Consensus
Margaret Thatcher once said that the problem with socialism is that, eventually, you run out of other people’s money to spend. Well, the problem with Thatcherism is that, eventually, you run out of taxes to lower.

Since last September, the truth of this has been visible to all those watching. The implosion of Liz Truss and Kwasi Kwarteng’s efforts to grow the economy through rehashed Thatcherism had numerous problems in its execution: blowing a billions-of-pounds hole in the budget, without a mandate from the electorate, and signalling further tax cuts and deregulation when the markets were already reeling. But it was also wrong from the get-go, its very premise outdated.

Much of the criticism of Jeremy Corbyn framed his proposals and politics as old-fashioned, being more suited to the 1970s and 1980s than the 2010s. This came from Labour figures – Tony Blair bemoaned Corbyn’s resistance to ‘modernisation’ – and from the right – The Telegraph crying that he would ‘drag Britain back to the 70s’. This has always been lazy. Corbyn’s proposals may have evoked pre-Thatcherite politics, but they also recognised the desire for change expressed most obviously in the Brexit vote, the idea of ‘Left Behind’ communities that have been so important to politics in the last decade (See PE#5).

Liz Truss recognised none of this. Pursuing growth in vain, Truss pursued full-tilt neoliberal economics, lifting bankers’ bonuses and cutting taxes for corporations and incomes. This was an explicit attempt to return the Conservative Party to its modern roots, to Thatcher, Friedman and Hayek.

At least Thatcher recognised the need for change. By the end of the 1970s, it was clear that the political tide was shifting. Labour PM Jim Callaghan asserted that the country couldn’t spend its way out of a recession, rejecting the Keynesianism the party had supported for decades. Heath, in the early 1970s, attempted to rush for growth in a similar way to Truss. Even the left of Labour asserted the need for change, though they argued for the polar opposite of Thatcher, for even greater public investment and workers’ control over the economy. All of these different strands reflected unhappiness with the corporate mixed economy that had been created in the aftermath of WWII, and Thatcher’s politics successfully captured this desire for change.

By contrast, despite Truss’ assertions, she could not represent change. She was the ultimate expression of the consensus of the past four decades. Instead, the new tide that’s coming in will likely be defined by more spending and a larger state in general (for more, see Power and Elections 6 and Tom Egerton’s new series New Consensus Notes). Truss could never have succeeded – she was one, rather small, figure swimming against the turning tide.

High Wages = Higher Tax Revenue
But how will this change be funded? There is no longer a magic money tree: quantitative easing, for so long a cheap way to borrow and invest, was wasted in the 2010s – now a fool’s game with today’s high inflation, and should not be used for day-to-day spending in public services. But the expansion of the state is coming, both due to current political pressures and future challenges, as I will cover below. Britain’s obsession with low taxation, therefore, needs a rethink.

As Roy Jenkins famously said, British people want “US levels of taxation with European standards of public services”. Maybe that’s true – but it’s certainly impossible. High taxation is a necessary part of having a welfare state, as it has been since its inception. 

Tax rises in this country, however, are not popular. Blair and Brown, even at the height of New Labour’s popularity, were wary of so-called ‘tax and spend’, daring to suggest tax rises to increase NHS spending only after their second successive landslide victory. This is still salient now, with even Labour-leaning millennials so-called ‘shy capitalists’ according to a recent study by Onward, fed up with high loan repayments and taxation and seemingly little reward in public spending. And the wealthy cannot pay for everything. The top 5% already pay half of all income tax, so any rise in their tax will not always raise significant funds. The IFS estimated that Labour’s proposed income tax increases on the top 5% in 2019 would raise around £6bn - just 4% of the NHS’ £153bn annual budget. What the country needs, therefore, is a wider tax base.

Put simply, raising wages to push more people into paying tax in the first place, and into higher tax brackets, will equalise the economy and, therefore, tax contributions. An astonishing 43% of British people paid no income tax at all in 2019, with only small contributions to National Insurance. Altogether, those in the bottom 95% pay just half of income tax revenue. This is not to demonise these people. No doubt they work just as hard as those who earn more and, as a result, pay more taxes. Rather, it is to say the opposite – those on low wages should be paid more, being better rewarded for their hard work and, therefore, contributing more to the public purse. Inequality must be reduced to fund our welfare state: and we can start by raising wages at least in line with inflation, ending the years of pinched purses and alleviating the current cost of living crisis that is contributing to our current economic malaise and overstretched welfare state.

“Wage-price spiral!”, I hear you cry, “you’re taking us back to the 1970s!”, you exclaim. But inflation is high not because of high wages for workers – they have been stagnant, and therefore falling in real terms, for over a decade – but because of the international situation and the astonishing profits of energy companies and other corporations. There was not, arguably, even a wage-price spiral in the 1970s, high inflation in that decade driven by the twin shocks of detachment of the dollar from other currencies in 1972 (the ‘Nixon Shock’) and high oil prices after the ‘Oil Shock’ of 1973 (for more detail, see Disorder by Helen Thompson). 

“Fine”, you say, “but people won’t accept high taxation, they’ll leave”. The age-old ‘Treasury view’: that high tax will lead to mass emigration/tax evasion/lower productivity as it is a ‘tax on hard work’. While theoretically possible, this is wrong for multiple reasons. First, the burden of taxation is already being felt by those on low earnings, with recent increases in National Insurance contributions, for example, without mass emigration. Shifting to a high wage economy is the change - proportionally, low-paid workers are already living in a high tax economy. Second, the country has already experienced decades of high wage and tax from 1945-1980 without huge emigration or productivity stagnation despite narratives of absolute decline. Rather, productivity has stagnated in the last 15 years as wages have stood still. Third, a functioning welfare state would be a welcome change, and at least as much of a ‘pull’ as higher tax would be a ‘push’.

And even if you completely disagree with the two paragraphs above, there is a final reason, the most important reason, we need to change our attitude to tax and spend. We have to.

Threats Domestic, Threats International
For decades, low prices have compensated for stagnant or only slowly increasing wages. The problem with this, however, is the country’s tax base shrinks in proportion to its expenditure. Tony Benn saw this coming, envisioning a deindustrialised economy, robbed of high-paying technical jobs over the 80s, resulting in difficulties funding the welfare state. This would result in ‘common sense’ arguments that we can no longer afford a welfare state. We have seen this recently, with figures like Sajid Javid arguing for some privatisation of the NHS through fee paying for GP appointments on the basis that its services are ‘unsustainable’.

Additionally, Britain has an old and ageing population. With a birth rate below replacement, and particularly with such toxic discourse on economic migration, those in work are going to have to start paying more tax to support the welfare state. People, obviously, rely on the welfare state more and more as they age, and so, to survive this increased demand, which will only add to existing ‘unsustainable’ arguments, welfare state supply will have to increase.

A similar story of increased demand plays out with the Brexit debate. No matter what one thinks of it, any serious commentator will tell you that Britain is poorer for leaving. This, of course, necessitates a drop in government revenues and this shortfall needs to be made up for somehow. This is particularly important considering many of those who voted to leave are those feeling most in need of a more providing state and economic settlement: Brexit was an anti-establishment, anti-consensus vote (for more on this, see Robert Shrimsley’s excellent article in the FT). There is a fundamental dichotomy, therefore, with the demand for a new consensus and an ‘unaffordable’ welfare state. And so tax revenue must increase. If the rich are not the complete answer, and ordinary people are already suffering, then we need to shift our economic model.

A New Attitude
A low tax settlement is already unsustainable – but with an ageing population, an economy suffering from Brexit, not even mentioning insecurities in the global economy like the war in Ukraine, a different economic model is clearly needed to fund our welfare state. Nothing else will do, considering the demand for a new economic and political settlement bubbling away under British politics shown so obviously in Truss’ failure. To be clear, I am not suggesting a rise in taxation for people already struggling in a cost of living crisis. What I am suggesting is a wholesale shift in our economy and attitude towards taxation, spending and wages for ordinary people. After all, our welfare state needs a different kind of economy if it is to survive.

But how do we do this? Find out in part two, covering how this approach can be politically possible and what kind of policies might be needed.

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