By Eliot Wilson
Is dismissing ideas about genuine reform of the tax system as “unfunded pledges” really the best the Labour leader can do? Asks Eliot Wilson
Taxation runs through politics like a golden thread. It was the battle for control over finance that precipitated the civil wars in Britain and Ireland, and “no taxation without representation” was a rallying cry of the rebels who fought for American independence.
Debates about taxation tend to focus on changes at the margins. Income tax will rise or fall by a few per cent, or the tax bands will shift, or personal allowances will move this way or that. Goods will be exempted from or subjected to VAT, or duties will be frozen or suspended. It is a combination of immediate budgetary management and political display, both parties do it and we all understand that.
Yet when he talked about wanting to abolish National Insurance in the long term, Jeremy Hunt was doing something rather more profound. Yes cutting the headline rate by a further two per cent, having already cut it at the Autumn Statement, was a political move driven by a looming election. But when Hunt appeared before the House of Commons Treasury Committee last week, he repeated that it was his preference to abolish National Insurance altogether. He was honest in saying that it would not happen quickly. “It won’t happen in one parliament, but it’s a long-term ambition,” he told MPs. “This is going to be the work of many parliaments.”
The reason it will take a long time is that it rests, the chancellor says, on two fundamental commitments: first, that it will not be funded by additional borrowing; and second, that it will noy be paid for through cuts to public spending. Effectively, he was saying, the economy had to grow its way out of National Insurance.
This is genuinely large-scale reform of how we consider liabilities and levy taxation. It is welcome, not least because National Insurance has now become something of a scam. The National Insurance Act 1911 created the charge as a contributory scheme to pay for new health and welfare measures, including unemployment benefit, so you’d get out what you paid in. But it was estimated at the time that it would run a substantial surplus. Although it was reformed in 1946, the link between contributions and benefits has essentially withered away.
National Insurance is almost a fifth of the government’s tax revenue, but it is not a ring-fenced budget to pay for health and welfare. The funds pay for the state pension and Jobseeker’s Allowance, but not for Pension Credit or Tax Credits; they contribute to the NHS but the vast majority of funding for the health service comes from general taxation. To an extent, then, NI is just another form of taxation, albeit one levied only on those in employment.
Sir Keir Starmer’s reaction to the chancellor’s proposals were understandable but disappointing. He attached a price tag of £46bn to the scheme and called it “an unfunded pledge”, even though Hunt had been clear it would not happen any time soon. Liz Kendall, the shadow work and pensions secretary, complained that “if Labour made a commitment 100 times smaller than this we would rightly be asked to spell out – where is the money coming from?”
We are facing a general election and politicians are behaving accordingly. Everyone understands that. It is unfortunate, though, that an attempt to examine in fundamental terms how we pay for government expenditure has been shouted down. Perhaps Hunt was foolish to think this was the right time for a philosophical pensée. Starmer should also reflect, in his quieter moments, if that is really the best he can do. This issue will not go away, and it is likely to be the Labour Party which next examines taxation and expenditure. Starmer, Rachel Reeves and others may rue their hasty words.
