How to raise taxes without unleashing a firestorm: lessons from former UK chancellors
The question of how to raise taxes without prompting public anger and media criticism will be on the minds of policymakers around the world as they begin to consider the yawning budget deficits caused by the COVID-19 pandemic.
Speaking at an online event hosted today by London-based think tank the Institute for Government, three former UK finance ministers provided some answers. Alongside George Osborne, who oversaw the UK economy as Tory Chancellor of the Exchequer from 2010 to 2016, were two of his predecessors: Alistair Darling, who held the post 2007-10 in the last years of the Labour administration; and Norman Lamont, whose tenure bridged the Conservative premierships of Margaret Thatcher and John Major.
Sugar fix
“You can raise taxes, but you need to explain why you’re doing it,” said Osborne, providing two contrasting examples of tax changes he had attempted.
The first was in 2012, when he announced a change to the UK’s VAT sales tax. The move, which seemed innocuous, was intended to standardise the tax on different hot food products. But, in doing so, it extended the tax to cover pasties – threatening to increase the price of this favourite UK snack.
There was fury in the media at the proposal, with then-prime minister David Cameron hounded at a press conference on the last time he had eaten a pasty. One of Osborne’s own party’s MPs warned of “thermometer-wielding tax inspectors poking our pasties”. The government reversed the measure.
So in 2016, Osborne steeled himself for what could have been a similar row when he announced a forthcoming levy — dubbed the “sugar tax” — to be paid by manufacturers on high-sugar drinks. “I was ready for a fight, I geared up for a fight, and it actually never even materialised on the day,” he said. The measure came into force in 2018: since then, the sugar content of many drinks has fallen.
Preparation and broad support were among the defining differences, he said. “A huge amount of ground laying had been done for a sugar tax, there had been a lot of talk about introducing a sugar tax, there were lots of third parties that were in favour of it,” Osborne said.
Bring in the experts
Meanwhile, Darling gave the example of raising taxes to pay for Britain’s National Health Service (NHS) – a contentious point at the time. Gordon Brown, who preceded Darling as Chancellor, had experts make the case for him.
“[Brown] knew that that [raising taxes for the NHS] was going to be controversial,” said Darling, “so he appointed a commission to look into the funding of the NHS, which recommended that National Insurance [a social security payment] should go up to pay for it.”
“It was a commission that clearly was like a train that was on a set of rails — it was pretty clear which station it was going to arrive at,” Darling said, but “by paving the way over an 18-month period, it was politically acceptable.”
The approach doesn’t always work. As Osborne noted, sometimes it’s almost impossible to convince the public of the case for raising taxes. He cited the example of fuel duty – a levy on petrol, diesel and other fuels.
This has been the subject of frequent protests. Examples include the British haulier blockades some 20 years ago which threatened to drag the country to a halt. The “gilet jaunes” (or yellow vests movement) in France, which began in 2018 partly as a protest movement against fuel taxes, stands as another cautionary example.
Start early
Yet even where an idea is tricky, governments must still try to make the case over time, noted Darling. He gave the example of how changing patterns of car use — particularly the advent of electric and autonomous vehicles — will make it necessary to introduce new ways of paying for roads as fuel duty revenues fall.
During the 2000s, the Labour government had to back down after proposing a system of “road pricing” where drivers would “pay per mile” travelled. But speaking on Tuesday, Darling said such a system – or some other way of raising more revenue from drivers – will need to be considered eventually.
“Governments of the future are going to have to say to people: ‘Look, we’ll need roads, you need to get about, it’s got to be paid for,’” he said. “When you make big structural changes in tax, it does take an awful lot of rolling the ground before you start it.”
Osborne agreed. “Replacing motoring taxes is going to be a huge challenge for a Chancellor… and I would start making the argument now,” he said. “When you can see the problem coming at you, the longer the runway to dealing with it the better.”
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Explain why, with the help of experts and start early. That looks fine. But I believe the people need also to understand and witness that the government is managing tax money in a proper and efficient way. When new needs arise, good practice that all government should take is share the funding between increased taxes and reduced spend on areas where the needs diminish. New needs need not systematically be financed 100% with new or increased taxes.