Considering all the Options: Re-balancing the UK Tax System at a Time of Economic, Constitutional, and Social Crisis
“In the near future, tax policy is going to have to move up the political agenda. Growing pressures on public spending going to require governments of all political stripes to make a stark choice: raise more revenue through taxation or additional borrowing, or revisit the scope and scale of public services”.
The Institute for Government, 2019[1]
“People think locally, but pay taxes nationally.”
The United Kingdom’s ‘Total Managed Expenditure’ in Financial Year 2019 was recorded as £844 bn of which £668 bn (78%) was disbursed at national level[2]. Increasingly, people think locally, but pay taxes nationally and there is a gap appearing in associated perceptions and expectations. In 2019, for example, central government spent £149 bn on health care. Local authorities spent £3.3 bn. Unsurprisingly, at the moment out of all policy areas the population is most concerned about health care, and yet local authorities do not have the resources to effect local change. Taxation has a huge impact not only on the economy, but also on social and even constitutional frameworks. Perhaps it is time to consider more radical change to the system in order to address these three critical perspectives in a coherent and sustainable manner. One option would be to collect and disburse the majority of taxes at local level, not nationally. Heresy? Lunacy? All too difficult? Perhaps not, and certainly worthy of more consideration.
“Taxation has a huge impact not only on the economy, but also on social and even constitutional frameworks.”
It is nearly seven years since the Institute for Fiscal Studies published a review of UK Tax Policy[3] which concluded that the approach of successive governments lacked coherence and that the UK tax framework was in need of a clear strategy for reform. The paper followed a comprehensive review of the UK tax system published by the Institute in 2011. Chaired by Nobel laureate Sir John Mirrlees, the report concluded that ‘Britain's tax system is ripe for reform in ways that could significantly increase people's welfare and improve the performance of the economy’.[4]
“Britain’s tax system is ripe for reform in ways that could significantly increase people’s welfare.”
There is little doubt that the Government’s Budget of March 2021 will include or promise some significant adjustments or additions to the tax framework (including increases) as it wrestles with the severely damaged post-COVID economy. There is speculation about a ‘wealth tax’, about changes to business rates (possibly to be re-framed as a ‘Capital Values Tax’), a reform of Capital Gains Tax, and changes to the taxation of online sales. None of these initiatives constitute coherence in delivering a fresh tax structure for the challenges of the contemporary global economy. Whilst they will be described as ‘sweeping and significant’ they are just more tinkering with an already complex and inconsistent framework. This is not reform and will not significantly impact welfare and economic growth. A fresh approach is required.
[1] Tetlow and Marshall. ‘Taxing Times: The Need to Reform the UK Tax System’. Institute for Government, July 2019.
[2] HM Treasury Public Spending Statistical Analysis 2020. HMSO, 17 July 2020 .
[3] Johnson, Paul, ‘Tax Without Design: Recent Developments in UK Tax Policy’. Institute for Fiscal Studies, May 2014.
[4] Institute for Fiscal Studies, ‘The Mirrlees Review: Reforming the UK Tax System for the Twenty-First Century’. Oxford University Press, September 2011.
.“Local people believe they are seeing less investment and resourcing to solve local problems.”
Taxation is perhaps the most tangible illustration of the ‘Social Contract,’ the connection between the citizen and the state. Paying taxes is a symbol of citizenship, but with the responsibility to pay, there comes an expected right to see benefit from revenue spending. In recent years negative perceptions have grown of the effect of government spending. Local people believe they are seeing less investment and less resourcing to solve local problems. The surge in support for BREXIT was in large part because regional Britain believed that leaving the EU would release tax revenues to previously underfunded communities. Perhaps because of COVID, there is a growing feeling that this hasn’t happened and will not happen. People are becoming rapidly disillusioned.
Of course, in and of itself leaving the EU was never going to allow increased investment of tax revenues. But the perception is dangerous and can only result in volatile politics, regional isolationism, and increasing local dissent. The recently published National Infrastructure Strategy aims to deliver benefits to local communities. Based on three central objectives – economic recovery, ‘levelling up’, and unleashing the potential of the Union it is backed by a promise to meet the UK’s emissions target by 2050 and the creation of a new infrastructure bank. This may be too distant a policy approach to connect with local communities and retain national integrity and support for a Conservative government.
In Financial Year 2019 the UK raised 35% of national income through taxation. This is one of the lowest rates in Europe, below those of Denmark, France, and Belgium (45%) and two points below the G7 average, but the highest rate in the UK for over fifty years. And yet the cost of social services – health, welfare, and education – is increasing exponentially. COVID has decimated the economy, just as it was beginning to recover from the austerity years since 2008 and the uncertainty of BREXIT. Not least because of the challenges of an aging population becoming less the elephant in the room than having a seat at the table, something must be done. Labour policy is clear: increase taxes. Conservatives will be politically constrained to follow suit, at least to the same degree, and so will almost certainly fall back on re-arranging the deckchairs. More complexity, less coherence.
In Financial Year 2019 just over 5% of overall national taxation was raised from Council Tax and retained Business Rates.[5] In real terms, however, this accounts for 84% of local councils’ budget.[6] In other words, central government grants from national tax revenues are wholly insufficient to meet local resourcing needs. This fails to meet the expectations of taxpayers who want to see their local council improve rather than simply maintain basic services – and the national government takes the blame. Over the last ten years, whilst council tax charges have crept up slightly, central government funding for local authorities has fallen significantly.
“Over the last ten years…central government funding for local authorities has fallen significantly.”
Taxation is perhaps the most tangible illustration of the ‘Social Contract,’ the connection between the citizen and the state. Paying taxes is a symbol of citizenship, but with the responsibility to pay, there comes an expected right to see benefit from revenue spending. In recent years negative perceptions have grown of the effect of government spending. Local people believe they are seeing less investment and less resourcing to solve local problems. The surge in support for BREXIT was in large part because regional Britain believed that leaving the EU would release tax revenues to previously underfunded communities. Perhaps because of COVID, there is a growing feeling that this hasn’t happened and will not happen. People are becoming rapidly disillusioned.
Of course, in and of itself leaving the EU was never going to allow increased investment of tax revenues. But the perception is dangerous and can only result in volatile politics, regional isolationism, and increasing local dissent. The recently published National Infrastructure Strategy aims to deliver benefits to local communities. Based on three central objectives – economic recovery, ‘levelling up’, and unleashing the potential of the Union it is backed by a promise to meet the UK’s emissions target by 2050 and the creation of a new infrastructure bank. This may be too distant a policy approach to connect with local communities and retain national integrity and support for a Conservative government.
In Financial Year 2019 the UK raised 35% of national income through taxation. This is one of the lowest rates in Europe, below those of Denmark, France, and Belgium (45%) and two points below the G7 average, but the highest rate in the UK for over fifty years. And yet the cost of social services – health, welfare, and education – is increasing exponentially. COVID has decimated the economy, just as it was beginning to recover from the austerity years since 2008 and the uncertainty of BREXIT. Not least because of the challenges of an aging population becoming less the elephant in the room than having a seat at the table, something must be done. Labour policy is clear: increase taxes. Conservatives will be politically constrained to follow suit, at least to the same degree, and so will almost certainly fall back on re-arranging the deckchairs. More complexity, less coherence.
In Financial Year 2019 just over 5% of overall national taxation was raised from Council Tax and retained Business Rates.[5] In real terms, however, this accounts for 84% of local councils’ budget.[6] In other words, central government grants from national tax revenues are wholly insufficient to meet local resourcing needs. This fails to meet the expectations of taxpayers who want to see their local council improve rather than simply maintain basic services – and the national government takes the blame. Over the last ten years, whilst council tax charges have crept up slightly, central government funding for local authorities has fallen significantly.
“Over the last ten years…central government funding for local authorities has fallen significantly.”
[5] Ibid.
[6] Amin-Smith, Harris, & Phelps. ‘Taking Control’. Institute for Fiscal Studies, March 2019.
[6] Amin-Smith, Harris, & Phelps. ‘Taking Control’. Institute for Fiscal Studies, March 2019.
There are two more practical problems that are only going to get worse in the future. First, councils are unable to raise more funds for local disbursement. Apart from the local resistance this would create there are also physical restraints on doing so imposed by central government. Secondly, local tax revenues will not keep pace with the rising cost of those services for which local authorities are currently responsible. Over the next twenty years, the difference will be exponential. Under current conditions, therefore, central government will either be forced to increase its grant funding or support significant increases to Council Tax and Business Rates. Neither approach is likely to win friends and influence many taxpayers and expectations will again be failed. In real terms spending by local authorities has decreased over the last ten years by about 8%. Something has to change.
The issue of the distribution of tax revenue is further complicated by those powers and funding delegated to Scotland, Wales, and Northern Ireland. Taxes devolved to Scotland under current legislation amount to 41% of the public spending budget there, but only 19% and 12% in Wales and Northern Ireland respectively. The inequities that this has introduced, as much in the minds of the taxpayer as in reality, and the tension between the three levels of taxation and their respective responsibilities has further complicated the national taxation structure. Complexity and confusion in the minds of those who pay the taxes and expect consequent benefit undermines the credibility of the system. This is also fertile ground for the politics of further devolution and independence.
"Complexity and confusion about the national taxation system plays to the advantage of further devolution
and independence."
In 2019 the Institute for Government called for significant changes to the UK tax system[7], saying that in the past ‘…change has proved difficult. The political risks are high and public understanding of tax is poor…’. The paper’s key finding was that ‘politicians should acknowledge that it is not just the amount of revenue that is raised that matters, but also how it is raised’. Unfortunately, successive governments have repeatedly rearranged the deckchairs around the amount of revenue raised, without acknowledging the potential demand for more fundamental reform. The Institute for Government stated that the period since 2008 in particular could be characterised as ‘strategy drift’ and ‘complication’.[8]
Conservatives do not believe in radical change. When there is a proven imperative for change, however, they are unafraid to develop new ideas whilst preserving the remaining benefits of previous. There is now a real imperative for change if the government is to retain national unity in its most basic sense, let alone retain its current Conservative majority with support from those areas of the country in the most challenging economic circumstances.
[7] Tetlow and Marshall. ‘Taxing Times: The Need to Reform the UK Tax System’. Institute for Government, July 2019.
[8] Ibid.
"Complexity and confusion about the national taxation system plays to the advantage of further devolution
and independence."
In 2019 the Institute for Government called for significant changes to the UK tax system[7], saying that in the past ‘…change has proved difficult. The political risks are high and public understanding of tax is poor…’. The paper’s key finding was that ‘politicians should acknowledge that it is not just the amount of revenue that is raised that matters, but also how it is raised’. Unfortunately, successive governments have repeatedly rearranged the deckchairs around the amount of revenue raised, without acknowledging the potential demand for more fundamental reform. The Institute for Government stated that the period since 2008 in particular could be characterised as ‘strategy drift’ and ‘complication’.[8]
Conservatives do not believe in radical change. When there is a proven imperative for change, however, they are unafraid to develop new ideas whilst preserving the remaining benefits of previous. There is now a real imperative for change if the government is to retain national unity in its most basic sense, let alone retain its current Conservative majority with support from those areas of the country in the most challenging economic circumstances.
[7] Tetlow and Marshall. ‘Taxing Times: The Need to Reform the UK Tax System’. Institute for Government, July 2019.
[8] Ibid.
There are three key objectives for development of the UK’s tax policy for 2021 and beyond:
“Local authorities lack the resources to make a difference to local problems and the practical and political headroom to increase their income.”
Rearranging the deckchairs again is not going to meet these objectives. Resources to fund public spending are currently largely concentrated on central government. Public spending decisions appear remote and inexplicable to a significant majority of the electorate. Local authorities lack the resources to make a difference to local problems and the practical and political headroom to increase their income. Meanwhile, iniquitous devolved funding to Scotland, Northern Ireland, and Wales increases complexity and confusion about the tax system and feeds the independence agenda. The problem is few of the deckchairs remain in the sun and rearranging them again will make little difference.
“One increasingly valid option is to reverse the current tax system and devolve tax collection to local level.”
It is a bold decision to move into the sun – and one fraught with practical difficulties to implement – but one that must be faced if real difference is to be made. One increasingly valid option is to reverse the current tax system and devolve tax collection to local level. Payments would then be made from local to national level to meet strategic public spending commitments such as defence, borders, and internal security, international development, and so on. Such a change would reconnect the taxpayer to the tax framework, provide levers by which local authorities could deliver benefit at local level and also drive growth from local level (including through achieving competitive advantage over other authorities), and de-pressurise the issue of devolved funding to Scotland, Wales, and Northern Ireland by forcing changes to the calculation and distribution of nationally generated revenue.
In a crisis, all options should be considered, and for the UK (if not for all nations) the COVID pandemic has set the conditions for an economic, if not a constitutional and social crisis. The solution, therefore, should seek to address the relationship of taxation with all three of these areas of risk. Not to consider significant change at the time of crisis would miss a valuable opportunity to make a real difference to the UK’s political landscape.
- Restore the credibility of the UK taxation system in the minds of the taxpayer. This requires clarity, consistency, and coherence.
- Ensure that public funds drive local benefits. Empower and resource local authorities to deliver local solutions to local problems, but public spending budgets at all levels will have to be increased in the face of rising costs of services.
- De-centralise the system in order to re-balance the relationship between central and local government. This is critical in order to preserve national unity and undermine the case for increased devolution and independence.
“Local authorities lack the resources to make a difference to local problems and the practical and political headroom to increase their income.”
Rearranging the deckchairs again is not going to meet these objectives. Resources to fund public spending are currently largely concentrated on central government. Public spending decisions appear remote and inexplicable to a significant majority of the electorate. Local authorities lack the resources to make a difference to local problems and the practical and political headroom to increase their income. Meanwhile, iniquitous devolved funding to Scotland, Northern Ireland, and Wales increases complexity and confusion about the tax system and feeds the independence agenda. The problem is few of the deckchairs remain in the sun and rearranging them again will make little difference.
“One increasingly valid option is to reverse the current tax system and devolve tax collection to local level.”
It is a bold decision to move into the sun – and one fraught with practical difficulties to implement – but one that must be faced if real difference is to be made. One increasingly valid option is to reverse the current tax system and devolve tax collection to local level. Payments would then be made from local to national level to meet strategic public spending commitments such as defence, borders, and internal security, international development, and so on. Such a change would reconnect the taxpayer to the tax framework, provide levers by which local authorities could deliver benefit at local level and also drive growth from local level (including through achieving competitive advantage over other authorities), and de-pressurise the issue of devolved funding to Scotland, Wales, and Northern Ireland by forcing changes to the calculation and distribution of nationally generated revenue.
In a crisis, all options should be considered, and for the UK (if not for all nations) the COVID pandemic has set the conditions for an economic, if not a constitutional and social crisis. The solution, therefore, should seek to address the relationship of taxation with all three of these areas of risk. Not to consider significant change at the time of crisis would miss a valuable opportunity to make a real difference to the UK’s political landscape.
Author
Andrew Firth, CEO, The Decision Problem
