Raising taxes won’t correct Britain’s long-term spending trajectory – but do the Tories have a better answer?

The Government doesn’t appear yet to know what is going to be in the Budget, which is exciting. But one thing is certain: Rachel Reeves is going to raise taxes again. Current media reports suggest this will be reserved for “the rich”, but as that won’t raise anything like the money she actually needs, chances are that ordinary working people are going to feel the squeeze.

To some, this is a welcome development; the New Statesman, for example, ran a cover a few months ago with the bald headline ‘JUST RAISE TAXES’. Certainly, to those of a progressive bent, it is more congenial than cutting spending, something which Labour backbenchers have in any event proved congenitally incapable of doing.

But does it actually solve anything?

In the short term, one supposes the answer is ‘yes’, inasmuch as it allows politicians to postpone for another six months or so any difficult decisions about the scale of the British state. In the long run, however, the idea that raising taxes presents any sort of solution is much less obvious.

As I’ve explained before, that the British State is being hollowed out by runaway obligations on a few big revenue spending areas, in particular the NHS, social care, and pensions. Not coincidentally, these are the main areas which the electorate will currently suffer no government to cut; the “moral panic” about in-work welfare, which so baffles the FT, is best understood as displacement activity, politicians looking for cuts in places they might be able to get away with making them.

The basic problem with this dynamic is that tax rises don’t change it. The extra revenue can balance the Treasury’s accounts in the present moment, but do nothing to alter the long-term trajectory of spending. The Chancellor is going to have to come back for more of your money again, and again, and again.

Given that Labour was elected on an explicit promise not to raise taxes on ordinary working people, that’s obviously not good politically. But it’s also bad for the economy. Further crushing the incomes of working-age people in order to prop up huge cash transfers to, for example, pensioners is not just morally unjustifiable, but in the teeth of a cost-of-living crisis it leaves vital sections of the population without much disposable income to spend.

So what should Reeves do? British politics is normally framed around a dichotomy of tax cuts versus rising spending. Yet what’s really needed right now is massive capital investment; unfortunately, cutting capital spending ranks higher even than raising taxes in the list of things politicians would prefer to do than cut revenue spending. Hence our non-functioning court system, lack of prison capacity, non-deployable military, etc.

Labour is therefore probably going to spend the next five years hobbling from tax-raising budget to tax-raising budget, even when at some point it loses the fig-leaf of expectation management provided by the OBR’s fictitious productivity growth forecasts.

That would seem to open up an opportunity for the Conservative Party, which somehow still leads with voters on being most trusted to handle matters economic.

But does it? The Tories might have an easier time delivering cuts to working-age benefits, but those don’t even rank in the top three spending areas pushing tax as a percentage of GDP endlessly upwards; they are at the same time even more beholden than Labour to the grey vote, and have dutifully committed to the pension triple lock for another decade whilst party conference had a huge poster boasting about the Party’s role in opposing the means-testing of the Winter Fuel Allowance, perhaps the most obviously justifiable cut on the books.

At the same time, the Conservatives’ traditional rubric would indicate that spending cuts would be followed by serious tax cuts. Yet it isn’t obvious that this would be possible. Under the so-called ‘Golden Rule’, Kemi Badenoch has committed that 50p in every pound of spending reductions would be committed to reducing the deficit; that leaves 50p to be divided between capital investments, which are a) urgently needed and b) very expensive, and any tax cuts.

This doesn’t mean that no tax cuts would be possible. But they would need to be well-chosen and narrowly targeted – abolishing clawbacks and cliff edges, for example, rather than anything like Jeremy Hunt’s pre-election cut to National Insurance, which landed in the sour spot of being vastly expensive in toto but constituting far too small a cut for individual taxpayers to move the dial politically.

And all of those challenges assume that Badenoch’s promised £47bn of spending cuts actually adds up, which has not yet been established. To put it in perspective, it is a larger cash reduction in government spending than Liz Truss needed to balance her tax cuts, and the general consensus amongst Tory insiders with whom I discussed that proposition is that it was politically impossible.

Of course, we have had a few more years of exponential spending growth since then. But has that been enough to mean that a previously undeliverable volume of cuts can now be delivered via “cuts to welfare, the civil service and foreign aid”? Believe that only when you see it.