Time Plus News

Breaking News, Latest News, World News, Headlines and Videos

Johnson’s £12bn tax gamble: big-state Conservatism or expedient politics?

Boris Johnson on Wednesday night presided over a group-therapy session for his disoriented Conservative party. “We are the party of free enterprise, the private sector, of low taxation,” the prime minister said, with emphasis. Tory MPs, gathered in the wood-panelled House of Commons committee room overlooking the Thames, hammered their desks in approval.

The truth, as is occasionally the case with Johnson’s political declarations, was somewhat different. Less than an hour later, most of those same MPs voted to endorse his plan to raise taxes £12bn a year to address the crisis in health and social care.

The move leaves Britain on course to record the highest tax burden — 35.5 per cent of national income — since 1950, when the country’s most radical Labour government under Clement Attlee was nationalising swaths of the economy and grappling with the aftermath of the second world war.

Many Conservatives still think of themselves as small-state, low-tax politicians walking in the hallowed steps of former leader Margaret Thatcher. But, the reality is that after 11 years of Tory government, a graduate in Britain, repaying student loans and paying the lowest rate of income tax, faces the loss of 50 per cent of any increase in their salary above £27,288, paid by an employer.

Boris Johnson during a visit to Westport Care Home in east London, just hours before he made the £12bn tax move © Paul Edwards/Pool/AFP via Getty Images

“It’s totally shit,” said one former Conservative minister, before then voting for the 1.25-percentage point rise in national insurance contributions — paid by both employers and employees — accompanied by an identical rise in dividend taxation.

The move represents a seismic shift in British politics. “It’s a huge thing that we have done — especially for a Conservative government,” says one ally of Rishi Sunak, the chancellor. The journalist Allister Heath, writing in the Daily Telegraph — Johnson’s former employer and bastion of conservatism — accused the prime minister and his MPs of being “complicit in the moral destruction of the Conservative party”.

Shrugging off this cacophony of Tory criticism, Johnson calculated that raising taxes to rescue the National Health Service was not only right, but that the British public would broadly embrace it. Johnson has told colleagues that the policy is not a gamble: “The gamble would have been not fixing the NHS,” he says.

The Conservatives always fear being portrayed at an election as presiding over a failing health service.

“This shows they are more interested in winning elections than keeping taxes down,” says Torsten Bell, director of the Resolution Foundation charity. Gary Streeter, a veteran Tory MP, adds: “The genius of the Conservative party is it can consistently reinvent itself. We exist to solve the problems of the day.”

Protesters outside Parliament in central London last weekend, calling on the government to tackle NHS waiting lists
Protesters outside Parliament in central London last weekend, calling on the government to tackle NHS waiting lists © Stefan Rousseau/PA

The impossible dream

The UK’s problem has long been its desire to have European levels of public services with US levels of taxation. This is impossible, says Paul Johnson, director of the Institute for Fiscal Studies: “You’ve got to make a choice.”

Increasingly, the UK, while distancing itself politically from Europe, is choosing the economic model of its geographical neighbourhood. UK taxation is not yet at German, Italian or French levels, but is moving in that direction.

Johnson, a prime minister of no fixed political abode, feared that NHS hospital waiting lists, exacerbated by Covid-19 and heading towards 13m patients, were a human and political catastrophe about to unfold on his watch. He also needs money to reform the country’s chronically underfunded social care system, where people face catastrophic financial losses if they suffer from dementia or other long-term diseases.

UK graduates will lose almost half of any salary increase to tax.  Chart showing Total tax wedge (marginal personal income tax and social security contribution rates on gross labour income), 2020 (%) for the following countries and UK graduates from 2022 Japan Canada US Germany UK France Italy

His solution, grudgingly accepted by Sunak, was a huge cash injection that would see money initially go mostly towards the NHS — once described by former Tory chancellor Nigel Lawson as “the closest thing the English have to a religion”. Later, theoretically after three years, some of that money would shift across to social care.

Sunak insisted this permanent increase in state activity must be funded by higher taxes, not borrowing: the country’s debt-to-GDP ratio is now at 100 per cent.

The tax rise broke a Tory manifesto pledge and was fiercely criticised before it was formally announced — Thatcherite minister Jacob Rees-Mogg said it was a “read my lips moment”, a nod to George HW Bush’s 1988 promise as a presidential candidate not to raise taxes which he was forced to go back on.

Chancellor of the Exchequer Rishi Sunak arrives at Downing StreetRishi Sunak, the chancellor, had to be convinced that Johnson’s plan to raise taxes to pay for a huge cash injection into the health service was the right policy for a Conservative government © Daniel Leal-Olivas/AFP via Getty Images

But in the cabinet room on Tuesday morning opposition was muted. Sunak challenged fellow ministers to advocate that the extra spending could be funded by more borrowing. Nobody advanced the case: fiscal Conservatism and the desire to balance the books trumped low tax Conservatism. “The top of the party is Thatcherite, not Reaganite,” says Damian Green, former deputy prime minister a reference to the US president’s policy of tax cutting and expenditure control.

This week’s announcement came after an attritional few months, during which tensions between Sunak and Johnson increased sharply, the Treasury whittled away at the overall cost of the package, insisting that a new cap on the lifetime costs of social care to be paid by any one individual should be set at £86,000 — the point at which the state steps in to help — far higher than Johnson wanted.

The policy, relentlessly tested by pollsters up until the last minute, was adjusted to make it “fairer”, including a higher tax on dividend payments and on working pensioners to counteract accusations that it placed an unfair burden on the lower paid and the young. Johnson was advised that voters would accept that Covid was a decent excuse for breaking an election pledge. Some even suggested the prime minister should rip up the relevant page of the party’s 2019 manifesto during his Commons speech. By the time it was ready for launch on Tuesday, he was convinced he could sell the plan.

Chart showing that the rise in national insurance will significantly increase money collected from this tax

The fact that he did not deviate from the tax-raising plan at the eleventh hour, as many expected he would given the furious backlash from Tory-supporting newspapers and rightwing MPs — took some by surprise given his previous U-turns. It prompted some to speculate that Johnson is about to enter a more decisive phase in his premiership.

Allies say Johnson resents the “Trolley” nickname attached to him by his embittered former adviser Dominic Cummings, who has written of how his job often involved trying to stop Johnson veering all over the place on policy.

“We were worried we would lose the tax,” admits one Treasury official, who feared Johnson would have his mind changed at the last minute. On this occasion he stuck to his guns. A relieved Sunak joined Johnson at a Tory reception on the House of Commons terrace on Monday to tell MPs: “We owe him our support and loyalty”.

Keir Starmer, the Labour party leader, has said the extra spending will do little to address the underfunding of the social care systemKeir Starmer, the opposition Labour party leader, has said the extra spending will do little to address the underfunding of the social care system © UK Parliament Photo/Jessica Taylor/AFP via Getty Images

Johnson’s calculation was based partly on polling, but also on a gut instinct on the policies that he believed he could sell to the public. “He’s the best campaigner in the modern era — there’s nothing to touch him,” says one cabinet minister.

Johnson’s decision to add a line to individual payslips identifying the new “health and social care levy” was seen by one Tory MP as “genius”. It will become known as the “Boris levy” — it will be like “Boris bikes”, the MP says, referring to the rental cycles rolled out by Johnson when he was London mayor.

The discomfort of the opposition Labour party at seeing Johnson ramping up spending on the NHS — a creation of the Attlee government — and using a national insurance levy to do it, as Labour did in 2003, added to the sense among Tory MPs that Johnson’s judgment was right. Labour ended up opposing the policy — to Downing Street delight — saying it would instead have raised an unspecified “wealth tax”.

A corridor at the Royal Blackburn Teaching Hospital: the pandemic has left as many as 13m people waiting for non-Covid treatment
A corridor at the Royal Blackburn Teaching Hospital: the pandemic has left as many as 13m people waiting for non-Covid treatment © Hannah McKay/Pool/AFP via Getty Images

Social care puzzle

Yet, problems lie ahead. A YouGov poll carried out for the Times after the policy was launched suggests that the public might be less sanguine about another tax rise than initial polling suggested. Tory support fell five points, handing the lead to Labour for the first time since January. Six out of every 10 voters said Johnson and his party no longer cared about keeping taxes low.

Keir Starmer, the Labour leader, said Johnson had failed to guarantee that the extra cash would sort out the NHS waiting list crisis and reassure families that they will not have to sell their home to fund future social care.

The social care policy, paid for by most workers, clearly benefits most those children hoping to inherit expensive family homes and worried the lottery of dementia might dash those expectations. Cummings tweeted: “The Tories are making the young — who can’t get a house and are on average/below average incomes — already screwed by a decade of hapless Tory government to work harder to subsidise older and richer people.”

The fear among many Tory MPs — and in the Treasury — is that the “emergency” package of post-Covid support to the NHS will never end up being transferred across to pay for improved social care. Tory MP Jake Berry says the NHS could be “a bottomless pit”.

One senior Tory strategist says that Sajid Javid, health secretary, has promised the social care switch will happen after three years of catch-up funding for hospital treatments, but adds: “It’s not worth the paper it’s written on.” That could be a real electoral problem if voters feel the effects of higher taxes but do not see the promised improvements

Bar chart of Tax revenues as a % of GDP, 2019 showing The UK is moving closer to the European model of taxation

Johnson and Sunak also, apparently, have little room left for fiscal manoeuvre if they want to increase spending in the future. “This will have to be the last tax rise,” says one Tory MP. After £25bn of higher taxes in his March Budget and £12bn now, Sunak, who is about to conduct a tough review of public spending across government, has promised colleagues that his October Budget will be a modest affair.

“We have to get into a different mindset,” says one Treasury official. “We can’t assess every press release on how much money we’re promising to spend.”

For Conservative MPs, these are confusing times. But Johnson may yet have a card up his sleeve. In October the independent fiscal watchdog is expected to say that the economy might not suffer as much persistent damage from coronavirus as previously thought.

If that happens Johnson and Sunak will be sitting on an annual windfall that the Institute for Government estimates could be as much as £25bn, that could be deployed now or shortly before a general election, possibly easing pressure on taxes. That would come as at least some relief to a party ill at ease with the high-tax, high-spending economy it is helping to build.

Source link