Lord Hannan of Kingsclere was a Conservative MEP from 1999 to 2020 and is now President of the Institute for Free Trade.
What is the biggest item in your family budget? Utilities bills? Holidays? The car? Maybe housing, whether through rent or mortgage payments?
No. There is one cost vastly higher than any of these others: your tax bill. According to the TaxPayers Alliance, the amount of tax paid over a lifetime by the average household is now £1,277,580 – an increase of £21,915 on the previous year.
The vastness of that sum is hard to take in. To put it in context, the amount paid in income tax alone, £571,740, is more than the average price of a home in every region of the UK, including London.
It is hardly as if you are getting the value of that sum back in the form of government services. If you kept the £1,277,580 and bought your healthcare out of it, paid for your kids’ education, set aside a portion for your pension and so on, you would almost certainly be better off.
Sloshing that sum through the tubes and chambers of the government machine, leaking a little at every stage to pay for the pensions of the DEI officers and whatnot, so that only a thin dribble comes back in services, is an astonishingly bad deal.
Why do we put up with it? Why don’t we vote for candidates who promise radical tax cuts, based on spending cuts? It’s hardly as if the current levels of state spending are normal. We pushed spending up during lockdown, supposedly as a one-off measure. Five years on, we seem utterly unwilling to return to the spending levels of February 2020.
Yesterday morning, Rachel Reeves made clear that she plans to break her manifesto promises and raise tax again. We must all “do our bit”, she says.
Her spokesmen have been flying kites for weeks now, briefing various ideas to journalists to see how much push-back each one gets. Freezing thresholds, capital gains tax, inheritance tax, taxes on pensions, taxes on property, taxes on savings and investments (which is what is meant by wealth taxes), straightforward hikes in income tax – the sky is thicker with coloured paper than during the Kite Festival of Gujarat.
Yet all invite the obvious response: taxes are already at a 70-year-high.
It is worth standing back and considering how anomalous our fiscal situation is. Before the Liberal budget of 1909, it was unthinkable that state spending could account for more than ten per cent of GDP. The First World War pushed that proportion up, and it never quite fell back to its pre-war level. The Second World War jacked it up much further, and it was slower to fall back – hence the economic disaster of the 1970s.
In the 1980s, Margaret Thatcher held spending steady while allowing the private sector to grow. Contrary to widespread belief, she did not cut total spending, which rose in every year of her premiership; she simply allowed the private sector to grow faster than the public sector, so that the state shrank in proportionate terms.
At the start of this century, the government spent 34p in every pound, a level which did not completely crowd out private-sector growth. Today, it spends 45p – making significant growth almost unachievable.
People respond to incentives. If you put up their taxes, so that they keep a smaller proportion of what they earn, they will be less productive. Similarly, if you hand them money unrelated to what they produce, they will be less productive.
I strongly recommend a book published two weeks ago, Prosperity Through Growth, by Art Laffer, Matthew Elliott, Michael Hintze and Douglas McWilliams.
They start with an obvious proposition, namely that governments should do only what cannot be better done by others: defence, a criminal justice system, funding elements of education and so on. Once governments expand beyond those core functions, every penny they spend means slower growth than if it had been left in people’s pockets.
From this simple axiom, they build outwards to propose significant spending cuts so as to allow for lower, flatter and simpler taxes, including the abolition of the taxes most deleterious to growth, namely those on savings, investment and inheritance.
What they write should be uncontroversial, obvious – banal, even. Instead, it is transgressive, the kind of agenda that Blobsters patronisingly dismiss as “interesting”, by which they mean “impossible”.
What is truly impossible is to carry on as we are. Governments have got very good at hiding taxes by dispersing and disguising them. Some are collected sneakily through corporation taxes, employers’ NI and the like, so that we experience them as higher prices. Others are collected at source: most people pay most tax through PAYE. And the tax system has become less flat over the past 25 years, with 35 per cent of working-age adults now paying income tax at all.
What cannot be disguised is the impact of excessive taxation and spending on growth. We are eating the seed corn; to snatch at immediate revenue, we are reducing future income. According to the Office for Budget Responsibility, the UK will borrow £137.3 billion this year – and, incredibly, will spend £111 billion of it on the interest payments for past borrowing (note – paying the interest, not repaying the debts).
This is an impossible, absurd, unsustainable position. Yet we prefer to talk about the Chancellor’s letting agents. More fool us.
