Business

Taxing issues for politicians to tackle

Tax form
Image caption Does the tax system need a bigger share of our incomes?

So we have an enormous government deficit.

You might be one of those who blames it on the recession, or on the banks, or on Gordon Brown perhaps.

But step back from the mistakes of the last decade and arguably the problem we face now is best thought of as the result of unresolved long term pressures that have been building up in the welfare state for decades.

It is simple. Year by year, economic growth means that we tend to get richer.

But the richer we get, the bigger the proportion of our income that we want to devote to health services and education.

Tax system

The important word in that last sentence is "proportion".

As our incomes grow, we don't just want our consumption of health and education to grow at the same rate, but to grow extra quickly.

In other words, when our income doubles we want more than twice as much NHS.

That would probably be true even we financed government services from our own pockets.

But if we do pay for them through our tax system, the implication is that over the decades the tax system needs to take a bigger share of share of our incomes.

To add to the pressure of spending on the NHS and education, is the long term growth of the benefits bill.

By accident or design, it has grown from 12% of national income in the early 1980s, to 14% when John Major's government left office to almost 16% now.

Post-war consensus

The issue of ever-growing demands for state spending as the population gets richer has long been around.

But it has been dealt with in different ways. In the period after the war, state spending grew and we were comfortable allowing the tax share of our economy to grow as well.

In Margaret Thatcher's term as prime minister by contrast, growth in both taxation and spending were constrained.

But since the early 1990s we have been in an era in which spending has been allowed to grow while tax rises have been a hard sell.

In fact, politicians have been reluctant even to talk about tax very openly since the 1992 election.

(Remember the Conservative's successful Labour's Tax Bombshell campaign? It has scarred the memories of politicians on all sides ever since).

Tax taboo

So we have found ourselves squeezed between our rising expectations of the welfare state, and our taboo over tax.

We have only managed to get by until now thanks to some occasional tax rises (usually of a less-than-obvious kind); the odd boom, some lucky breaks and by shrinking other government spending (defence was 5% of national income in the early 1980s, falling to below 3% when John Major's government left office and where it has remained ever since).

But our luck has run out. We haven't raised taxes enough to keep spending at these rates. Which means we have that unresolved deficit.

That's more or less how we got here.

Now of course, if the welfare bill could be scaled back to the 1980s level, the problem of the deficit would be more manageable.

But we would still have the year-on-year pressure for extra spending on the NHS and education.

Parliamentary solution?

You could argue that strong governments would just resist the demands for bigger government.

Image caption The coalition government has to make spending decisions

But that is not really a solution to the problem if it involves artificially depriving an ever-more affluent population of the services it wants.

For the left, the answer is obvious: if people want more NHS as they get richer, let taxes rise year by year to pay for it.

For the right, there is an equally obvious solution too. If you don't want taxes to rise year by year, and you do want more health spending, stop paying for health care through taxation.

For the politicians in the middle, it is a much harder call.

The coalition is struggling with it now as it tries to maintain NHS spending as it cuts other departments budgets by a quarter over the course of this parliament.

We'll see how they get on over the course of this parliament.

Evan Davis's series Evan Loves Tax is broadcast on Radio 4 on Monday, Tuesday and Wednesday this week at 0900 BST, repeated at 2130.The programmes will also be available for seven days on the BBC iPlayer

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