Are the promises of “Tax cuts” in the British politics current? The succinct answer is “No”. The long story is: It depends on what you mean by tax cuts. It is certainly possible to openly or (more likely) covertly reduce some taxes and increase others, but reducing the overall tax burden will be much more difficult.
To be at least credible, any promise to reduce the ratio of taxes to gross domestic product (GDP) requires a sustained and significant simultaneous commitment to reduce the level or growth rate of spending. Theoretically this is possible. For example, a party may promise to cut healthcare spending, but will they be elected?
In July 2023 the Office of Budget Responsibility (OBR) has published an excellent report entitled “Fiscal risks and sustainability” that illuminates the situation with depressing clarity.
Firstly, the UK suffered a series of shocks which, in the words of the OBR “caused the worst recession in three centuries, the sharpest increase in energy prices since the 1970s and the largest sustained increase in borrowing costs since the 1990s.” This also led to the government recording the highest level of borrowing since the 1940s, the National debt reached its highest level since the early 1960s and the cost of servicing debt reached its highest level since the late 1980s. The country cannot get away with casual irresponsibility Liz Truss demonstrated.
Secondly, the dynamics of The economy has been weak since the global financial crisis. That’s no surprise. In 2009 I argued that the UK would suffer a permanent loss of output and trend growth. This is because the financial sector has turned it into an economy that experts call a “monoculture.” No other sector has created comparable wealth.
Third, The country is facing the challenges of an aging society, a less favorable economic and security environment and climate change. Containing elder care costs will be a major battle. Defense spending must increase. And the need to protect the country from the effects of climate is inevitable.
It is therefore not surprising that public finances look anything but solid. The recent high spending caused by the crisis could decline and the share of non-interest spending could fall from 41 percent of GDP in the period 2022-2023 to 39 percent in the period 2027-2028, according to the OBR study. But the underlying pressure will push it back later. This also ignores the reality that the pressure to increase spending is already enormous, particularly in healthcare. In short: the situation is fragile in the short term and unsustainable in the long term. Taxes will rise.
So Any attempt to reduce taxes by a significant amount relative to GDP without simultaneously committing to spending cuts is a fraud. Politicians who make such promises without saying how they will pay for them weaken the legitimacy of an already fragile democracy.
Of course, that doesn’t have to stop politicians from explaining how they can offset tax cuts on some with increases on others. The current tax system is a mess. It needs to be simplified and made more coherent. It can also be fairer and more efficient by shifting taxes from labor and investment to land and other forms of wealth, as well as environmentally damaging activities. Smart tax reform can even stimulate much-needed growth.
Now it is The British must not be hysterical for him current tax rates. Yes, taxes are higher than in the US, for example, but British values are not American values. In fact, they are more European. The Netherlands, a richer country than the United Kingdom, had a tax rate of 44 percent in 2022, compared to 39 percent in the United Kingdom. As Oliver Wendell Holmes Jr. said, “Taxes are what we pay for a civilized society.”
Nor should we assume that faster economic growth will solve the dilemma. As economies get richer and wages rise, the relative cost of public services tends to rise, and so does demand for them.
Ultimately, taxes depend on spending. How much (and where) a country spends and how it pays for it is a political decision. Define the type of country you want to be in. That’s what it’s all about, not fantasies of cuts that will pay for themselves or magically produce growth.