David Gauke is a former Justice Secretary and was an independent candidate in South-West Hertfordshire at the 2019 general election.
It is perhaps the possibility of an early election that has triggered a spate of tax policy announcements in recent weeks.
Andy Burnham may have ruled out the possibility of going to the polls, but other political parties are not taking any chances and are setting out their retail offer to an electorate that feels as if it is paying too much in tax.
To be fair, it was the new Prime Minister who started the trend by cutting VAT on electricity and introducing targeted reductions for business rates in his first few days in office. Reform UK then declared that they would raise the personal allowance for income tax to £15,000, the Conservative expressed an ambition to abolition inheritance tax, and the Liberal Democrats used their conference last week to announce that they would temporarily cut fuel duty by 10p per litre and also raise the personal allowance to £15,000 as well as raising the threshold before the higher rate kicked in.
No doubt there will be many voters who welcome this. Taxes, after all, are at a record level (albeit it is high-earners and businesses that are bearing a greater burden rather than the median taxpayer) and living standards are affected by rising costs. Political parties naturally want to be on people’s side, and calling for tax cuts is a good way of doing that. But, just at the moment, calling for substantial tax cuts is not so much an example of being in-touch with public opinion but out of touch with fiscal reality.
The situation is stark. Our debt levels are high, and have grown substantially since the Global Financial Crisis and were boosted significantly by the impact of the pandemic. Debt costs have also risen. In the 2010s and up to 2022, our debt interest bill was typically £40bn a year. This year, the OBR forecast in March that we will pay £110bn. Except market movements mean that this will be an underestimate. The 10-year bond yield has risen from 4.45% at the beginning of March to 5.35% today, which suggests that the debt interest bill for this year will be revised up by a further £8bn. To put that in perspective, £8bn is twice the size of the prisons budget for England and Wales.
It would wrong to say that this bond market movement is all because the markets do not trust UK fiscal policy. A lot of this is to do with inflation expectations, and we are more exposed to higher energy costs than many places. The AI boom means that there is more competition for investment so that government bonds need to offer a more attractive yield than was the case in previous times. In contrast to what happened after the mini-budget in 2022, the spike in bond yields applies across most major economies. But the reality is that the UK pays more for its debt than any other G7 economy and a lack of fiscal and economic credibility can make matters worse.
We saw that last year when it looked as if Rachel Reeves was about to resign, and astute observers of the markets – such as Lord O’Neill – have noted that the markets have been uncomfortable with some of the vibes emanating from Burnham. Just last week, the OECD warned countries about the risks of rising debt interest costs and the need to control and reallocate spending.
All of this means that anyone aspiring to be power should be conscious that a successful government will need to reassure the markets. It really should not be that difficult. Commit to credible fiscal rules. Support independent institutions that keep the government honest. Identify areas of spending that bring little economic return and promise to control those costs (I would start with scrapping the triple lock). Set out supply-side reforms that will bring down costs and therefore inflation, with energy and housing costs being the most obvious examples. And refrain from making any stupid pledges that make the public finances even more precarious. Just at the moment, it is this last point that is proving to be quite so troublesome.
The parallel between Reform UK and the Liberal Democrats is remarkable, and should be making both parties rather uncomfortable. Both are promising very big increases in the personal allowance. This is a very expensive policy (roughly £20bn) and will certainly have a positive impact on living standards. It will improve work incentives, but if the priority was economic growth there are better taxes to cut. Both parties claim that the policy is funded, but in both cases their plans could be described as being, at best, ambitious.
Reform UK want to cut welfare spending. The Lib Dems want to re-join the European Union’s Single Market and Customs Union. As it happens, I have a certain amount of sympathy with both objectives. We do need to get the welfare bill down and, as for getting closer to the EU and improving our access to European markets, most economists would argue that this should boost growth and, therefore, tax receipts. But with both policies, the process will be complicated and the final outcome uncertain. What if welfare reform proves to be just a little more difficult than Reform UK is claiming? What if negotiations with the EU do not go entirely to plan? These are not arguments against trying on either objective, but spending the proceeds of policy change when there is such uncertainty over its implementation is reckless.
As for the Lib Dems policy of cutting fuel duty, their argument here is particularly weak. Higher prices at the pumps, they argue, means higher VAT receipts on fuel – which is true. That means we can use this windfall to cut fuel duty temporarily. Er, no. Higher energy prices have lots of impacts on the public finances, most of them bad. We cannot take one item – VAT receipts on petrol and diesel – and ignore the rest.
The wider point is that we cannot ignore the general state of the public finances, which is grim. Energy prices are up, and we cannot afford to shelter the public as a whole from the consequences by fiddling around with taxes and duties in this way. There might be an argument for protecting the most vulnerable with targeted policies, but that is not what we are talking about here.
Reform UK and the Liberal Democrats are the worst offenders, but the Conservatives also need to be cautious about its offer, especially as the Truss experiment still tarnishes the party’s reputation. SDLT is a bad tax, and a good area to focus upon, as Kemi Badenoch did last year. More work is needed to credibly claim that welfare savings will be able to fund its abolition, especially as the triple lock remains off the table. As for the idea of abolishing IHT, there is much more that could be said about the policy but in the current situation it is neither affordable nor the right priority if the party is really serious about growth.
The role the Conservatives should play – in contrast to the other parties – is to tell the truth.
And the brutal truth today is that there is no money left for anything but, at best, the most growth focused tax cuts.
So here is a test for the Conservative Party at next week’s party conference. Be better than Reform UK and the Liberal Democrats and refrain from making any stupid pledges on tax.