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Both the Conservatives and Labour have made the same pre-election promise not to increase taxes on working people. They’ve also made many other promises to improve the NHS, crack down on illegal immigration, build more houses and many other things. So how do they think they can do these things without raising taxes?
The short answer is that they are gambling on being able to grow the economy so they have more money to pay for new things. But that’s easier said than done.
The two main parties have pledged not to raise the rates of the biggest three sources of tax: income tax, national insurance contributions and VAT. (This is except VAT private school fees, which Labour has promised to introduce).
They also have committed to stay within the same rule, which says that the country’s national debt should be falling as a percentage of GDP – the total value of all the goods and services the country produces – within five years. And they are using as the basis for their plans the same forecast that the government’s Office for Budget Responsibility gave in March.
Both parties have also promised promised to freeze tax thresholds – the amount you have to earn before you pay the different taxes – at the current levels. And they’ve promised to raise the same amount by cracking down on tax avoidance.
The problem is that it’s simply not possible to maintain the same level of taxes, spend more on public services and borrow less.
This is particularly because income tax, national insurance and VAT collectively account for about two thirds of the total tax revenue. By ruling out increases in these biggest taxes, the two main parties are limiting their choices on spending on public services.
The only way that next government can avoid further public spending cuts is by focusing on policies that will lead to higher economic growth.
The International Monetary Fund predicts that UK economy will grow by 0.5% in 2024 and 1.5% in 2025.
There has also been a significant fall in inflation – the rate at which prices rise – to 2.3% in April 2024. And this means the Bank of England may lower interest rates this summer, making it cheaper to borrow money and reducing the cost of things like people’s mortgages so they have more money to spend on other things.
This may speed up the rate of short-term growth and help in the recovery of living standards.
But the economic outlook still looks gloomy. The increase in the size of the UK population and workforce, mainly through immigration, has been good for economic growth. But this has been offset by rising numbers of people not working after the COVID pandemic.
Another area of consideration is the fall in what’s known as labour productivity, which is a measure of how efficient a country is – how much money it makes for the amount of work people do. When productivity rises, people can earn relatively more and their standard of living goes up.
Historically, growth in UK productivity has been around 2% a year, but since the financial crisis it has been growing at a much slower rate.
This has also been exacerbated by the pandemic, Brexit and other global challenges. UK productivity was around 16% below the US and Germany in 2022.
Other than higher economic growth, the other area that any new government could focus on is tax reform.
Changing the tax system to make it more attractive to invest and start your own business, could be a top priority of any new government. Policies to promote growth could attract much-needed private investment as well as helping businesses to grow.
Labour’s commitment not to raise the headline rate of corporation tax, which companies pay, for example, will give businesses more certainty for long-term investment plans.
However, the danger remains that whichever of the two main parties wins the election – and it looks likely to be Labour – they won’t be able to raise enough money through growth or tax reform to make meaningful improvements to public services.
We have all heard people complain that politicians are all the same, and never do what they promise to do. So if their gamble doesn’t pay off and they can’t improve public services, trust in our political system will continue to fall.
Shampa Roy-Mukherjee does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
