Will the era of unleashed state spending create a trend towards big government and higher taxation?

The huge increase in public spending has naturally led to an increase of governmental borrowing. Prior to the pandemic it was forecast that the government would borrow around £50 billion in 2020/21, but this grew to £300 billion. This came too in an environment where, because of Brexit, the UK's economy is predicted to 4% smaller than it would otherwise be by 2030. 

The problem of debt is long-term, and so as we come out of the pandemic and the economy returns to something close to normal what is the long-term structural position?

Debt, how bad is it really?

It was argued that increased borrowing in the short term may not be the real issue at hand. Our debt is not that high by historical standards – and it should be manageable with low interest rates and market understanding that, given the situation, in order to protect living standards and prevent scarring to the economy that exceptional borrowing was justified. 

Having said that, it may be harder to lower that debt than, for example, after the war. Post-war Britain had strong economic growth which ate up a lot of the debt, and our circumstances are now different. We will struggle to keep interest rates artificially low while we pay it off, and even that depends on whether markets decide to move against us. 

This will not be an immediate problem. We can live with a higher level of debt more easily and cheaper than usual. The problem will become apparent if we continue to borrow heavily to fund public policy. 

Not done yet: future spending

What should be worrying us are these spending pressures which will continue to drain our coffers, even on top of the current fiscal situation:

• COVID-19 catch-up in health services, education and so on, for which over £10 billion is projected,
• 'The Levelling Up Agenda,' or the government flagship policy to help those parts of the UK who have particularly struggled in recent decades,
• Reaching Net Zero by 2050, which could cost us up to £344 billion over the next thirty years,
• Social care, which has particular strain post-pandemic with an aging population and shifting demographics. 

Over-promising and under-delivering

How many of their current policies are the current government over-promising on? 

When it comes to areas of policy like their climate change policy to reach Net Zero by 2050, is it a matter of bowing to public pressure for bold targets without admitting the cost involved? It was discussed that the only way to truly meet these targets would be to funnel money into research and infrastructural development to bring emissions down, with the only potential for return in carbon tax. A carbon tax would always be unpopular, and so is this a matter of the government being too nervous to admit the cost to voters?

This thinking can be applied to 'levelling up' too. The idea was key to a Conservative victory, as it may have helped sway 'swing voters' in constituencies like Hartlepool, but can the government afford to follow through?

POLITICAL

British politics is always changing, but we are going through what looks like an entire re-drawing of the political map. The Conservative majority is at its healthiest since Margaret Thatcher was Prime Minister in the 80s, with 'The Red Wall' shrinking with every election. A recent illustration is the Hartlepool by-election in 2021, where the Conservatives won for the first time in decades. This is just one example of several Northern or Midland towns full of voters who are culturally conservative but have voted Labour all their lives are becoming 'swing voters'. 

It was argued that this is not just a matter of Brexit, nor is it a one-off: people are voting in a different way on cultural grounds and values, rather than just for economic values. Traditionally, voters have chosen based on their economic position first and cultural values second. The Brexit vote was the clearest illustration we have had that this is changing. 

This may be because Labour have shifted their focus away from economics and the redistribution of wealth, and towards cultural politics. Their voters have traditionally been a coalition of the working class and left-wing intellectuals, but they are fraying. The older, traditional Labour supporters are no longer hearing anything about how the party will help them, but rather how they're helping 'other people'. This is freeing many of them up to be snapped up by the Conservatives, who appear to have the traditional British public at the centre of their messaging. 

This new swathe of Conservative voters are leading to shifts within the party. Politicians need to respond to public opinion, and Boris Johnson won these new seats for a reason. He will want to keep them, and that electoral pressure is dragging the party in new directions. The Conservative party has changed a lot throughout history, always identifying the best way to remain in power. That is why while the Levelling Up project may not succeed, they will need to show effort – and the best way to do that is to spend a lot of money. 

If we apply this thinking to the USA, we see a similar system but one that is more advanced. Donald Trump also won traditionally Democrat voters over with his emphasis on nationalism. If we go back a few generations we can see areas like West Virginia, traditionally poorer, industrial and Democrat, nestled next to Virginia which was wealthy, urban and Republican, both of which have now completely swapped politically. 

In both cases, due to ageing populations and the increase in education and diversity, we may find that in the long-term trends may help Labour not the Conservatives but it is the Conservatives who have adapted most rapidly. It was argued by this group at the Exchange, however, that the political imperative to appeal to a section of the electorate by throwing money at them is against the traditional Conservative way. How can that be reconciled, and which would prevail? It would entirely depend on the economy. If, in two years time, we have jittery markets and financial instability we might find that the Conservatives will 'return to their true faith', but if the economy is shaping up again it is more likely that they will attempt to keep pleasing people. Boris Johnson has, after all, been described as a patriotic social democrat. 

OPPORTUNITIES FOR FUTURE TAXATION

The way to get a lot of money out of tax-payers is to tax the greatest number of them. The three main taxes which could face change were identified as income tax, VAT, and National Insurance contributions. However, perhaps to their chagrin, the current government went into their election saying that they would not increase the rates of any of these three. 

What else is there?

Corporation tax could be raised. While it's currently at 19%, it is already being raised to 25% by 2023, or business rates could be increased. Rishi Sunak's budget brought the first increase in corporation tax since 1974. 

An introduction of carbon tax, including on domestic fuel, although this is controversial and politically difficult given the expense for fuel for the elderly.

Shift in property or wealth tax. Wealth tax will be explored later in this report, but in this session it was noted that in order to raise big sums of money it needs to come from lots of people, but in that vein in the interest of perceived fairness voters will always ask why the rich aren't being taxed more. It was even suggested that in order to increase taxation for ordinary people, one would have to increase taxes for the wealthy in order to be demonstrably fair, after which one would have 'permission'.

The introduction of different types of consumption tax as an alternative to VAT. A radical reform that was suggested was a 'progressive consumption tax' whereby one would have to tell the Exchequer the amount one had spent over the course of a year, minus what would be considered 'investment expenditure'. 

Increased tax for non-doms, with the issue being that they are highly mobile and may simply leave to avoid increased taxation. It was raised that, while we encourage non-doms to come to the UK we do not encourage them to spend their money here – is HMRC too cautious when it comes to business investment relief and encouraging trade with UK companies?

SO, ARE WE HEADING TOWARDS 'BIG GOVERNMENT'?

It was noted that it is too early to tell, and we will be able to know more once we have moved our way forward out of the pandemic – although it does look as if there is a medium term trend towards it. How we respond to the economic crisis and how the economy and markets react in turn could be the answer, but whether all this translates materially we will have to see.