Economy: Budget Statement

Lord Wood of Anfield Excerpts

Tuesday 13th November 2018 Lords Chamber

[Lord Wood of Anfield (Lab)]

My Lords, I will follow on seamlessly from the noble Lord, Lord Wakeham, and talk about who pays tax and how much we as a country pay in tax. Those are two points—one on which the Budget was silent and one on which it was loud but misleading.

The first is an issue that gets less attention than it should because it is important to our nation’s fiscal health—the state of our tax base. The Budget continued the trend of all Budgets since 2010 by raising, once again, the personal allowance threshold—this time to £12,500, a year earlier than planned—as well as increasing the higher-rate threshold to £50,000. I suspect that across the House there is agreement that taking low-income earners out of taxation has the right goal, at least, in mind—but the consequences of doing so for the breadth of our tax base should give us pause for thought.

The personal allowance has increased by 120% in a decade. That is 94 percentage points more than inflation. Decisions by successive Chancellors since 2010 will reduce income tax receipts by £24 billion alone through the personal allowance threshold increases. That is 1% of GDP by 2021. In the past decade the proportion of That is 2 million fewer people paying any income tax at all, despite population growth.

The narrowing of the tax base has been accelerated by the boom in self-employment, which has been concentrated among low earners. The proportion of self-employment incomes below the personal allowance threshold has nearly doubled in 10 years, from 30% to 60%. There is a similar story of narrowing the tax base elsewhere—in business rates, in stamp duty land tax and perhaps also in capital gains tax. Across the spectrum, government policy decisions mean that we are reliant on an ever-lower number of tax payers.

Why is that a problem? Because increasing our dependence on a diminishing number of taxpayers exposes the public services that they fund to the risk of economic volatility and the risk of losing tax revenue as wealthier taxpayers’ behaviour changes to reduce their tax payments or avoid them. The richest members of our country face a tax system that taxes their income but hardly makes a dent in their wealth or property. From an economic point of view, that is madness. No wonder so many high earners reduce their income tax bills by swapping 45% tax rates on their high income for considerably lower taxes on the companies they form to hold their income.

If we are to preserve the health of our tax base, we need to return to making distributional decisions through varying tax rates and using existing taxes on the books that we are scared to touch—such as the fuel duty escalator, which sits in mothballs in our tax system—rather than by eroding the tax base. We also need to extend the tax system to encompass wealth, rather than just income, to broaden the tax base and have a tax system that matches how people make their income.

The second issue is connected to the tax base. It is the question of ending austerity and how to finance the turning on of the public spending tap that the Chancellor claimed to have rediscovered in his Budget speech. The overall strategy of the Chancellor’s Budget is quite easily summarised: he got a windfall from the OBR and decided to spend the lot. I applaud much of the philosophy behind that. In particular, the Chancellor has acknowledged in theory what every decent economist has been saying since George Osborne went to the Treasury in 2010: the consequence of austerity is lower growth. In contrast to George Osborne, the Chancellor now wants to boost growth, partly through more spending—and, as the IFS remarked, he has therefore given up on meeting his surplus target by the mid-2020s.

I welcome that, as well as the decision to ensure that overall spending on day-to-day public services will rise, not fall. But we have to get real about this. First, spending the windfall in one Budget to make the direction of public spending tick upwards instead of downwards is not an end to austerity. Existing promises on spending in health, aid and defence mean that a host of public services, from prisons to social housing, social care and local government, still face cuts. As the Resolution Foundation commented, unprotected departments’,

“per capita real-terms budgets are set to be 3% lower in 2023-24 than 2019-20. If allocated equally this would mean real-terms per capita … cuts between 2009-10 and 2023-24 of 48%, 52% and 77% for the departments of Justice, Business and Transport respectively”.

The bigger point is that, even after the Budget’s spending spike, the growth in overall spending remains significantly below historic norms. In 2010 the share of GDP spent on day-to-day public services was 18%. In 2022 it will be 14%. The amount of uncommitted public spending outside protected areas is rapidly dwindling. Astonishingly, the IFS forecasts that health spending will constitute 38% of all public spending by 2023.

The truth is difficult for all parties. We are a country that does not spend enough on its public services. The Budget does not change the legacy of austerity of the past eight years for the long term. In the EU, which we are still just about in, we are ranked 21st out of 27 countries for the percentage of GDP devoted to government spending; that is 4.5% below the EU average. The Chancellor rejected his predecessor’s orthodoxy on austerity—rightly, because it has been catastrophic. But reversing it will take more than a Budget spending spree. If we want to use public spending to support growth and protect and rebuild our depleted public services in a sustainable fiscal way, we have to bite the bullet and raise the percentage of GDP we pay in tax.

There is lots we could do to make a start on this. We could whittle down the tens of billions of pounds that currently go to the best-off in our country in pension tax relief; we could examine ways of taxing wealth assets that generate so much undertaxed value for the best-off; and, as I said earlier, we could use existing taxes more rationally and fairly. The funding of public services is for our lifetimes, not just for Budgets and elections. Since 2010 we have been subjected to a multiyear experiment in what happens when you deliberately target public services and the public sphere to reduce spending. The results are now in and they are not pretty. If we are to turn the page on those years, rather than simply give lip service to the idea of the end of austerity—as I fear the Chancellor did—we need to change fundamentally our approach to the tax base and the tax system.