On Friday we learnt, in a parliamentary written reply by Stephen Dorrell, Financial Secretary to the Treasury, that those Budgets will raise the tax burden for a married man with two children above the 1978-79 level in 1994-95. This will be true across a wide range of incomes - even those earning 50 per cent more than the average wage will pay more tax.
It does not look good for the Conservatives: they claim to be the party of low taxes; they assert that Labour is the high-tax party. Yet after 15 years of Conservative government, the tax burden will be higher next year than when Labour was last in power.
So was the election won on a false promise? Not really. Although taxes will be higher under the Conservatives in the Nineties than they were under Labour in the Seventies, that does not mean they are higher than they would have been under a Labour government in the Nineties. Let me explain.
During the election the Conservatives claimed that Labour's manifesto promises would inevitably lead to higher taxes. That claim was borne out by John Smith's shadow Budget, which promised a sharp increase in national insurance contributions to pay for, among other things, higher pensions. It was also based, more controversially, on an analysis of Labour's medium-term spending plans, which were costed at pounds 35bn.
Statements about what might have been cannot be proved or disproved. But nobody seriously disputes that the Labour Party believes in a higher standard of public provision than the Conservatives. Indeed, it is the main philosophical divide between the parties.
In the field of social security alone, the Labour manifesto contained promises to increase the basic pension, uprate it in line with earnings rather than prices, equalise the pension age at 60, improve and extend the invalid care allowance, increase child benefit and guarantee more generous maternity leave. As a matter of simple arithmetic, the money to meet these promises could only come from higher taxes or higher borrowing.
Had Labour won the 1992 election, one of its priorities would have been to establish itself as a competent manager of the nation's finances. Guided by the Treasury, it is virtually certain that John Smith as Chancellor would have judged it essential to reduce the level of public borrowing. Indeed the financial markets wouId have left him no choice. The main difference between him and Norman Lamont or Kenneth Clarke is that he would have been unwilling to cut spending. We would have seen neither the freeze on public spending that was put in place after the 1992 election, nor the spending cuts that were delivered so unexpectedly in Mr Clarke's Budget.
So a responsible Labour government, seeking to bring public finances under control, would have found it hard to touch public spending, leaving more to do on the tax side. Labour would have had to raise taxes to correct the borrowing problem, and then raise them again to pay for its ambitious spending plans.
But that only underlines the basic question most people ask: why do taxes apparently go on up and up under both political parties? The answer is they don't. The trend is upwards, but there are sharp cycles. That is reason why the tax burden comparison with 1978-79 is so unflattering to the Government. Taxes in that year were unsustainably low because it was a boom year. Although public borrowing was high, it had been falling sharply. Public spendlng had been held back by a draconian public pay freeze and this made it possible to cut taxes ahead of the election.
The first priority of the incoming Thatcher government was to put the public finances in order. To do so it presided over a rise in the tax burden much sharper than the one now in prospect. The collective memory of Baroness Thatcher's period of office is coloured by the tax cuts of the late Eighties. Few realise that if we take the tax system as a whole, those famous tax cuts did not, by a mile, reverse the rise in the tax burden caused by the increases of the early Eighties.
We are now seeing a re-run of that episode. Conservative governments want low taxes, but not if the price is high borrowing. Taxes are being increased by John Major's government, as they were by Lady Thatcher's, because sound finance is the overriding priority.
Given this borrowing constraint, it follows that any attempt to cut taxes over the medium term can only succeed if spending is cut. The real embarrassment for the Government is that public spending this year takes a higher share of GDP than it did in 1978-79. But again the economic cycle has played an important role. Spending falls as a share of GDP in an economic boom and rises in recession: 1978 was a boom year, and the finances are currently still adversely affected by the recession. The underlying spending share is almost certainly lower than in 1978. But try explaining that to a noisy House of Commons.
The main lesson to draw from this debate is that there are powerful long-term upward trends in public spending, and hence on the tax burden, which even Conservative governments find hard to resist. As they get richer, people expect higher standards of health and education. They are prepared to spend more of their own money on these things, and they vote for governments which promise to spend more public money on them. They also accept an increase in the social security bill, which has nearly tripled as a share of GDP since the war.
The money for this extra public spending becomes available almost automatically under our tax system. We regard it as fair that the better off should not only pay more tax, but actually pay a higher proportion of their income in tax. A progressive tax system, as this is called, automatically generates a rising tax burden because as economic growth occurs and incomes rise, more people move into tax, and some of those paying tax move into the higher tax bands.
As a nation we are nearly 30 per cent better off than we were in 1978. Other things being equal, we might have expected the tax burden to rise quite a lot in response to that increase in real incomes. It has not done so because the Government has seriously attempted to control spending and reduce taxes. But it has been struggling against strong secular forces which pull in the opposite direction. In this game you have to run very hard just to stand still.
The author is former special adviser to Norman Lamont and a director of London Economics.Reuse content