Hunt and Reeves should engage in a grown-up debate about their economic plans rather than mislead the public about what will likely have to happen to taxes under their watch, Chris Dorrell writes
There has been an absence of truly meaningful economic debate during this election campaign to date, which is a real concern given the range of challenges facing the UK.
Bit is particularly worrying since the most important economic aspect of the campaign so far has been the commitment by both parties not to raise any of the major taxes after the election.
The promises on tax are difficult to take seriously given the fiscal framework that both Rachel Reeves and Jeremy Hunt have pledged to work within – a framework that requires debt to be falling in five years time.
The Office for Budget Responsibility (OBR), created in 2010, judges whether the government is on track to meet this rule, publishing economic forecasts alongside every Budget and Autumn Statement.
In the Spring Budget, Hunt was only just able to get debt on a downward trajectory. Even that required significant tax rises, through frozen tax thresholds, and spending reductions which could see unprotected departments face per person spending cuts of around 3.0 per cent.
Of course Hunt has knocked a combined 4p off National Insurance, but the tax burden is still rising.
Looking on a macro level, tax as a share of national income is expected to rise from 36.5 per cent in 2024-25 to 37.1 per cent in 2028-29. Government spending meanwhile will fall from 40.8 per cent to 39.0 per cent. Under those circumstances, debt is only just projected to fall.
Since then, the government has pledged to lift defence spending to 2.5 per cent of GDP, a pledge which Paul Johnson at the Institute of Fiscal Studies (IFS) reckons will cost around £12bn a year.
On the spending side, most economists think it is impossible for the government to maintain public services at their current level while also going through with the planned spending cuts. It would cost another £20bn or so to maintain funding for these unprotected departments.
The other alternative is that the next government launches major reforms of public services, drastically scaling back the state’s role in the economy.
But these are the two choices: either taxes rise to maintain public services, or go through with major reform. You’ll notice neither of these have featured in the election campaign so far.
The International Monetary Fund (IMF) has put its cards on the table, suggesting that Hunt’s current departmental spending plans “do not appear to sufficiently account for known pressures in public services”.
On its estimate, there needs to be £30bn of tax rises to get debt on an assuredly downward path.
So, if we do not want to see any further deterioration in the performance of our already stretched public services, it seems fairly clear that taxes need to go up.
Labour has laid out a fairly limited set of tax rises, including introducing VAT on private school fees and closing the carried interest loophole on private equity. A couple of other policies – the windfall tax on energy companies and reforming non-dom status – have already been stolen by the Conservatives, but Labour would extend them further.
“That is the sum total of the tax increases that we are putting forward,” Reeves said last week. Speaking on a podcast last week, Johnson said these policies will raise “trivially tiny” sums.
Since then Reeves has also ruled out a return to austerity, that means she will have to find the money from somewhere. Her hope for squaring the circle is that a growing economy will enable Labour to dodge difficult choices on spending cuts or tax rises, at least for a while.
There’s just one problem. The OBR is very likely to downgrade its longer-term forecasts for the economy due to sluggish productivity growth. An Autumn growth downgrade will dent projected tax receipts, making it more difficult than ever to meet the fiscal rule.
It seems voters are also dubious about the tax pledges of both parties. A poll done for the Financial Times showed that a majority of both Conservative and Labour votes thought that the next government would have to raise taxes.
Taxes are going up whoever wins the election. It would be better to have a transparent debate about which taxes should be going up rather than persisting with fantasy economics.