Published:

The 1981 Budget raised taxes during Margaret Thatcher’s first term in government.  Two years later, she won her second general election by a landslide.  Does that piece of history cast light on Boris Johnson’s future?  We believe that it does.

Like Rishi Sunak last week, Geoffrey Howe, Thatcher’s Chancellor, didn’t shy away from raising taxes on incomes.  (After all, what is the new Health and Social Care Levy, a form of national insurance which working pensioners will pay, if not a kind of income tax?)

But the differences between the two plans are at least as significant as the similarities.  Howe’s plan was executed in the context of a broader restructuring of the personal tax system.

His first Budget of 1979 had shifted its burden from income tax to VAT – cutting the top rate of the former from 80 per cent to 60 per cent, and its standard rate from 33 per cent to 30 per cent.

So the direction of travel was clear, despite the sharp detour.  By contrast, the approach of this Government to taxation is uncertain – partly because of the exigencies of “getting Brexit done”, partly because of the consequences of Covid.

Furthermore, the purpose of the 1981 tax rises was unambiguously communicated.  Borrowing was too high, and so were interest rates.  The purpose of the increases was to get it under control, thus allowing the economy to grow once again.

The plan worked.  Growth in 1981 was minus 0.7 per cent.  By the time of the 1983 election, the economy was growing rapidly again: the figure for the year was 4.2 per cent.

By contrast, the purpose of last week’s rise was muddled.  Will the new levy, which kicks in in 2023, really go to fund a new Social Care Plan?  Or will it be swallowed up by the NHS’s never-ending demands?  (And if it makes no real difference, what’s the point of it?)

And even if implemented, the Social Care plan will address one aspect only of the current political problem – people having to sell their houses to meet the costs of care.

It is hard to see how the scheme will increase supply or raise standards in the sector as a whole.  Or how it will substantially address the needs of the half of social care provision expended on people of working age.

And it’s not even as though the plan, welcome though it will be for many homeowners – in the event of it happening at all – will guarantee that the sale of family homes to help fund social care will come to an end.

Which is wide of the commitment made in the last Conservative Manifesto.  This promised to “consider a range of options but one condition we do make is that nobody needing care should be forced to sell their home to pay for it“.

Mind you, that wasn’t one of the manifesto’s headline pledges.  At its very start, under the heading “My Guarantee”, and a photo of Johnson, were the words: “we will not raise the rate of income tax, VAT or National Insurance.”

So that’s one, two – and a third manifesto promise broken last week.  “We will keep the triple lock,” it said.  But this will be suspended for the coming year.

So, then: we have a tax rise that isn’t part of a clear plan; that won’t necessarily fund social care at all; that, if it does, will only tackle one aspect of its challenges, and which is in breach of manifesto commitments.

There are times when the mood of the public swings away from spending increases: the run-up to the 2010 election was one of them.  And there is always a segment of the public in favour of tax cuts, especially for council tax, income tax and fuel duty, according to YouGov.

However, the lesson we draw from the 1981 Budget is that raising taxes can work if the Government has not yet lost credibility, if the increases are part of a credible plan, and if they are straightforwardly presented.

In our view, it won’t be fatal if such a plan breaks a manifesto commitment amidst a crisis.  We suspect that Johnson and Sunak might have been able to get away with announcing a temporary rise in national insurance last week to help pay for the NHS’s Covid backlog.

(Though the money will provide less value than it might.  As Lord Ashcroft wrote yesterday, “despite its vast funding, the NHS is hopelessly short of doctors and nurses and far too relaxed in its attitude to taxpayers’ time and money”.)

So why didn’t they do so?  The answer lies in a fundamental difference of view between the Prime Minister and the Chancellor about tax and spending – and of priority as last week’s decision approached.

For there is more to the Government’s uncertainty over the future of tax and spending than the hangovers from Brexit and Covid, even assuming that the latter is a spent force.

Johnson is a Keynesian, or at least a Boosterist.  Sunak is a monetarist – or, at any rate, a conventional Conservative Chancellor.  Furthermore, the Prime Minister seems to have been consumed by his commitment on social care and home sales.

Protecting what some conservatives see as middle class welfareism seems to be a priority for the Prime Minister.  And he had claimed when first entering Downing Street as Prime Minister that he had a “clear plan” to stop people selling their homes to help pay for care.

What seems to have happened is that Johnson met Sunak halfway.  The Chancellor yielded to the Prime Minister over social care – however partial the plan may be.  And, broadly speaking, the Prime Minister gave way to the Chancellor over funding.

The consequence, other than a package with the weaknesses that we have described, is the narrowing of the Conservative lead in Politico’s poll of polls to three points.  The one will be connected to the other.

As a rule, our position is closer to the Chancellor’s, and indeed to Thatcher’s: spending control comes first, tax cuts come second, as that 1981 Budget suggested.

But if a short, sharp spending increase to help meet the Covid NHS bill is required – and we stress “if” – ConservativeHome suspects it would have been best for the Government to say so, put the social care plan to one side, and borrow the money.

Public spending this year is planned to be some £1,093.2 billion.  The Health and Social Care spending plan comes in at £12 billion a year for the next three years.

Borrowing that sum would seem unlikely to bust the markets’ confidence in the Government’s economic management.  Sure, there is a limit to their tolerance of government wheezes (such as a new social care plan, however narrowly constructed) funded by borrowed money.

But one-off borrowing for the NHS, announced within the framework of the coming Budget, might not have frightened the horses.  As it is, Sunak’s cupboard looks bare for October 27th.

The Prime Minister and the Chancellor are making a great show of solidarity.  The latter told Conservative MPs last week that they owe the former their loyalty.

We can’t believe that Johnson will move Sunak in any reshuffle this week – or in the near future.  But you can bet that the two men are thinking as follows.

The Chancellor will be worrying about Prime Ministerial schemes that would require further tax rises.  The Prime Minister will be resenting the Chancellor tugging at his wings, as he sees it, every time he wants to soar into the skies.  These tensions bode badly.