The Tories will have to raise tax to cope with Covid-19
As a country, we need to talk about tax. Rishi Sunak didn’t want to mention the T-word when he was quizzed by the Treasury Select Committee this week. But with a return to austerity ruled out, the chancellor will have to pre-announce some tax increases in his autumn Budget, even if they don’t take effect until next year or the year after so they don’t choke off the recovery. Although Conservative MPs prefer their comfort zone demand for tax cuts, everyone at Westminster knows it’s not a question of whether taxes rise, but how. The fiscal watchdog, the Office for Budget Responsibility, has warned that £60bn of increases are needed to stabilise the public finances.
The select committee is asking the right questions in an enquiry launched yesterday. It is also looking at tax reform, including how to protect the tax base from globalisation and technological change and whether windfall taxes should play a role in the post-coronavirus world. The tech giants should probably be nervous. “Tax will play a major role in the years ahead in restoring the public finances and ensuring that we have a recovery which is balanced across the UK and fair to all,” said Mel Stride, the committee’s Tory chair. But we can’t take for granted that Sunak will come up with a “fair to all” package.
A debate among Tory MPs has begun about whether tax rises should be across the board or more targeted. Right-wing traditionalists fear a “soak the rich” approach would alienate the party’s natural supporters, but universal measures, such as George Osborne raising VAT from 17.5 to 20 per cent after the financial crisis, would be regressive. VAT is bound to be put on the agenda again by Treasury officials, but it would hurt the Tories’ new working-class voters in the red-turned-blue wall seats in the north and Midlands. It would also breach the Tory manifesto of only seven months ago, which outlined a “triple tax lock” of no rise in the rates of income tax, national insurance or VAT. This month Boris Johnson told the Yorkshire Post that he stands by the pledge.
Although describing a £350bn deficit as unforeseen circumstances would be an understatement, Sunak appears to be looking at areas not covered by the manifesto promise. Reform of capital gains tax (CGT) to raise it to the level of income tax could bring in £90bn from householders and investors over five years. The Tory tax-cutting brigade would hate such a “stealth wealth tax” and “levelling down”. But Johnson’s "levelling up" agenda must surely involve a bit of levelling down when higher taxes are inevitable.
VAT is bound to be put on the agenda again by Treasury officials, but it would hurt the Tories’ new workingclass voters in the red-turned-blue wall seats in the north and Midlands
CGT reform would probably play well with the blue wall Tories. Research published by UK in a Changing Europe found Tory MPs and party members are more right wing than their voters. The new working-class Tories might also welcome other measures to make the tax system fairer. Adding new council tax bands at the top end of the property market is long overdue; in England, the tax is based on 1991 property values. Green taxes would help the Johnson government do more than merely pay lip service to a climate emergency eclipsed by coronavirus but which will return with a vengeance. A social care tax was under consideration by ministers before the pandemic; the case for one has now grown.
In the long run, the tax treatment of the self-employed will be brought into line with other workers. Sunak has signalled such a move but will have to tread carefully because many self-employed people missed out on his measures to help people through the current crisis. Tax reliefs, which cost the Treasury more than £120bn a year, should be curbed, including the generous relief on pension contributions for higher-rate taxpayers. The triple lock on the state pension is doomed, ministers admit, to prevent a big rise when earnings bounce back.
Of course, many Tory MPs would regard such an agenda as un-Conservative and more suited to Jeremy Corbyn’s playbook. While Sunak is at heart a fiscal conservative, he has rightly told us this is no time for “orthodoxy” or “ideology” and that the Tories must be “unencumbered by dogma”. Sticking to that mantra is in the Tories' interest. Johnson’s new working-class supporters will decide the next election. Ominously for him, new polling analysis by former YouGov chair Peter Kellner suggests a 7 per cent swing to Labour among these voters since December’s election, probably enough to put Keir Starmer into Downing Street at the head of a minority government.
Some Tories worry that Johnson will not do enough to keep the new blue wall voters on board. Their
regions were among the hardest hit by coronavirus, and are now among the most vulnerable to unemployment and a “no trade deal” Brexit on 31 December. His and Sunak’s decisions on tax will provide the crucial test of whether Johnson is prepared to upset his party’s natural supporters in order to hold on to its new ones.