Ryan Shorthouse is the Director of Bright Blue.
One of the dominant political issues of this decade has been whether and how to eliminate the UK’s structural budget deficit. The Coalition Government halved the budget deficit as a proportion of GDP, but it remains historically and internationally high. Despite the transformed political landscape in 2016, its eradication is still essential for economic stability, confidence and fairness.
Nonetheless, the planned year of the end of deficit reduction has been and should remain flexible because of changing economic circumstances. The original date of the Coalition Government to achieve fiscal surplus was 2015-16, but was incrementally postponed to 2019-20, rightly. George Osborne’s decision to abandon ‘Plan A’ and slow deficit reduction from 2012 enabled stronger economic recovery. Now, because of predicted slower economic growth caused by the Brexit vote, the current Chancellor is right to push back the timetable for achieving a fiscal surplus to as early as possible in the next parliament.
The Office for Budget Responsibility estimates that the budget deficit is likely to be 0.7 per cent of GDP by 2020-21, but this is heavily dependent on the performance of the economy between now and then, which most forecasts suggests will slow, with inflation rising and tax receipts falling. On top of this projected sluggish growth are demographic pressures on spending, namely on health, social care and pensions: the Institute for Fiscal Studies predicts that, to achieve the main fiscal objective of a surplus by the latest 2025-26, there will need to be a further £40 billion worth of fiscal tightening in the next parliament through either tax rises or spending cuts.
So the Conservative Party will have to go into the 2020 General Election promising another strong dose of austerity. This comes in the context of a forthcoming period of an acceleration in cuts, biting four per cent from public spending between now and 2019-20, with reductions in expenditure on working-age benefits and local authorities particularly deep again. Inflation is set to rise and the proportion of national income derived from tax is set to rise to the highest it has been in thirty years. To sustain the support of a tiring public, the planned austerity measures then must be carefully considered; specifically, we will need austerity based on popular and moral principles.
Three principles should be used to guide future conservative decision-making on fiscal retrenchment.
First, government should now prioritise fiscal support for those on modest incomes, so those with the broadest shoulders should face more of the austerity burden. Second, future austerity should truly mean “we are all in this together”. This ought to refer to departments and services, not just individuals. Time to share the cuts more widely across different departments and revisit ring-fenced expenditure. Third, that as we have responsibilities to others, not just ourselves – what Theresa May refers to as “the shared society” – behaviour that has damaging social and environmental costs should bear the brunt of future tax increases, not behaviour that accrues significant private and public benefit (such as work, which is subject to income tax).
To save the tens of billions needed to achieve fiscal surplus in the next parliament, there will have to be income-generating measures that include a handful of major ones alongside lots of minor ones. The ideas here are by no means exhaustive: the principles should be used to develop other, more radical policies.
Let’s start with ending big ticket items such as the triple lock on state pensions and regressive higher-rate tax relief on private pensions. Add to that significant means-testing of universal benefits for older people such as the Winter Fuel Allowance and free bus passes. The cuts to working-aged benefits since 2010 have been and continue to be disproportionate and unnecessary to protect retiree incomes. For intergenerational fairness, time for older people – especially more affluent ones – to contribute to the austerity pot.
There are tax benefits to those on higher incomes that should be targeted for future rises. Owner managers of for-profit companies can pay themselves in dividends, which is subject to a lower rate of tax than income, although the government has raised this slightly. These directors should pay income tax instead. The planned increases in the tax-free allowance for Inheritance Tax, which will eventually allow all people to pass on assets worth £500,000 tax-free by 2020, should be abandoned. The long list of VAT-exempt goods and services could be shortened while avoiding negative distributional implications, starting with fees for private schools, overwhelming the preserve of very affluent families. Finally, new Council Tax bands should be introduced on the most expensive properties.
With pensioner income no longer protected, it’s also time to reassess the current commitment to real-term increases in government funding of the NHS. Alongside welfare and pensions, the NHS is by far the biggest source of government expenditure. The annual level of cash injection the NHS has been receiving this decade is much lower than the last. Demographic demands and the costs of technologies and medicines has made this funding level sub-optimal, recently undermining the punctuality and quality of NHS services. But this level of taxpayer subsidy is unsustainable and unnecessary. Time to expand co-payments, which already exists in the NHS: to GP and missed doctor and hospital appointments, for example. And Government should be focussing on getting NHS England, Clinical Commissioning Groups and Local Authorities to increase contestability in the commissioning of services, which has been shown to improve both performance and efficiency.
Taxation should be raised on activities with significant externalities. The sugar tax, when it is implemented in 2018 for soft drinks, should be extended to all food and drink products with high levels of sugar. The rise in Fuel Duty has been frozen for seven years in a row. This, and Vehicle Excise Duty, should be increased for diesel cars and high-emission vehicles. Some forms of polluting and publicly subsidised transport are disproportionately likely to be used by those on higher incomes: road and air, for instance. Expansion of toll roads on major motorways would be a good start. Air Passenger Duty should be increased. Frozen for the past three years, it’s time to also gradually raise the Carbon Price Support, the amount paid by heavy energy users per unit of carbon dioxide produced.
Every little helps, of course. Post-Brexit, the Government should restrict access to benefits of EU migrants for five years, so it is in line with the rules for non-EU migrants. Each Government department should also have an independent body scrutinising and publishing the effectiveness of the grants it distributes to outside bodies such as charities, as the Independent Commission for Aid Impact does with the Department for International Development. And the civil service can definitely be trimmed.
If the next round of austerity is to be popular and succeed, it must be justified by strong moral principles.