Drastic times need drastic action: breaking the 50-year tax taboo

Not for the first time we are facing a nasty economic shock. At such times it can be useful to learn from the past; and now is an especially auspicious moment to look back at one particular moment in history. For this week sees the 50th anniversary of a budget that contained a policy which has never been repeated, but should perhaps be considered now.

On April 15, 1975, Denis Healey, the Labour chancellor, presented his budget. An economic crisis was upon us. Inflation was running at close to 20 per cent, unemployment was rising, and the pound falling.

The UK was, alongside the rest of the world, suffering the consequences of an international crisis created by a massive rise in oil prices. But the UK was suffering more than others.

In a budgetary act of economic self-sabotage not rivalled until the Liz Truss/Kwasi Kwarteng debacle of 2022, the Ted Heath/Anthony Barber Conservative budget of 1972 had bet the house on a huge spending spree designed to kick-start growth. Healey’s two mini-budgets of 1974 had doubled down. With industrial unrest unmanageable, pay settlements at astronomical levels, the stock market plumbing new depths, and borrowing unsustainable, it was time to pull back from the brink.

The IMF crisis of 1976 is more famous, but it was in 1975 that policy began to turn and economic realities to be finally, belatedly, acknowledged. The government looked into the abyss and took the first, tentative, steps back from disaster. Among those steps, announced that Tuesday in 1975, was an increase in the basic rate of income tax. That is a step that has never, not once, been repeated in the intervening half century. Mr Healey also raised almost all the other, multiple, rates of income tax. The basic rate rose from 33 per cent to 35 per cent and other rates by 2 percentage points to 40, 45, 50, 55, 60, 65, 70, and 75 per cent. Only the top 83 per cent rate was left unchanged. That, presumably, was because, with a 15 per cent investment income surcharge, raising this rate to 85 per cent would have set the marginal tax rate on “unearned” income at 100 per cent; something considered beyond the pale, even in 1970s Britain.

Since then, chancellors have raised all the big taxes. The main rate of VAT increased in 1979, 1991 and 2011. Rates of national insurance contributions, both for employees and employers, have been increased time and again. The corporation tax base has been broadened and, more recently, the rate has been sharply increased. More and more people have been dragged into higher rates of income tax. But the basic rate? For 50 years chancellors have moved heaven and earth first to cut it to its current 20 per cent and then to avoid increasing it.

We know, of course we know, that raising it would have been a better way to secure revenue than was the increase in employer national insurance contributions (NICs) that came into effect a week ago. This government is trapped by its own absurd mantra that it will never raise taxes on “working people”.

Sir Keir, increasing employer NICs is increasing tax on working people. It reduces employment of working people, and it lowers their earnings. Continuing to claim that you can raise revenues to pay for improved public services while not taxing working people is the sort of dishonest cakeism more frequently associated with a certain recent Conservative prime minister.

Given where we are now, with growth forecasts almost certain to be downgraded, Rachel Reeves, the chancellor, is likely to face two options in her autumn budget: abandon her fiscal rules or increase taxes. She will, I hope, resist the siren voices urging her to take that first course. Borrowing is already uncomfortably high.

As Sir John Kingman, my old boss at the Treasury, put it in a wonderful piece published last week, to those who believe additional borrowing is the answer to our problems, “I suggest they simply glance at the significant rise in the premium the UK is already having to pay in world markets to borrow very large sums each year … That is a clear warning sign. Of course no fiscal rule can be perfect. But the UK sovereign is already treading a very delicate path, along a cliff-edge in deep fog. The protective fence may or may not be in quite the optimal place. But removing it seems unlikely to be a good idea.”

If we can’t shift our fiscal guard rail by much, and with the spending review concluding in June, by the autumn budget that leaves tax as the only margin for adjustment. Not a comfortable choice given that the overall tax burden is already at a record high level. It is there because effective tax rates on, and tax takes from, high earners and corporate profits are at record levels. It is there despite the fact that the direct tax burden on average earners is below where it has been for most of the last 50 years. There is even less truth than usual in the simplistic mantra that any additional taxes should come not from “working people” but solely from those with the “broadest shoulders”.

That’s just another example of the long political tradition of pretending that “we” the people, can have our cake while “they”, the others, pay. No country raises more tax than we do without taxing working people more than we do. Lumping yet more taxes on high earners and companies will put at risk the growth the government says it is so keen to foster.

If Reeves does find herself in need of more money come the autumn, perhaps she should take a leaf from the book of her distinguished predecessor both as Labour chancellor and as an MP for the city of Leeds: break the 50-year taboo, be honest and transparent in her choice of tax policy, and raise the basic rate of income tax.

This article was first published in The Times, and is reproduced with kind permission.