Amongst the welter of commentary about a Conservative chancellor raising corporation tax as well as freezing a number of tax thresholds, a parallel has been drawn with Denis Healey’s Budget of 1974 which was the last one to raise CT rates. A better analogy would be to Geoffrey Howe’s Budget of 1981 which also froze tax thresholds and increased tax substantially.
In a number of ways, the position facing the Conservative chancellor in 1981 had important similarities to that of 2021. Unemployment was rising rapidly towards its peak of more than three million people. The economy was struggling to adjust to new realities. Businesses were closing at a rapid rate and it was doubted that various sectors of the economy would ever recover. The government had been forced to make a substantial number of U-turns and there was significant doubt over the direction that it would take. Public spending was increasing as welfare costs and the costs of supporting business went up. Battered by events, the government’s future looked uncertain.
Sir Geoffrey Howe, as chancellor, decided to tackle the budget deficit with a range of public spending cuts, but importantly, also tax rises. Up to that point he had been a very radical chancellor; in 1979, cutting the top rate of income tax for earned income from 83% to 60%. He almost doubled the standard rate of VAT in his first Budget as well. Most daringly, he abolished completely exchange control which was a temporary measure put in in 1939 as a wartime expedient but curiously had remained on the statute book ever since. A reminder that temporary measures curtailing freedom can become more permanent.
The 1981 Budget was seen as a turning point because it renewed the government’s commitment to fiscal responsibility. Indeed, the 1981 Budget froze tax allowances when inflation was considerably higher than it is today and therefore the fiscal drag effect was much greater. However, raising taxes was not seen as a desirable goal by Sir Geoffrey Howe any more than I suspect that Rishi Sunak views this as his aim. Apart from filling in the hole in the public finances, the tax rises were there to send out a clear message that if the public wants higher spending, then there will be a tax price to pay. In this Budget, the chancellor could have phased the increase in CT, but I think he opted to put it in one go to have a sort of ‘shock and awe’ affect.
How quickly could Rishi Sunak reverse course on tax?
The OBR figures give some pointers to this. As ever, the OBR is cautious about predicting economic growth once the pandemic has finished and the inevitable bounce back in the economy has occurred. It predicts a growth rate of 1.7% and 1.6% for 2023 and 2024 respectively. Previous OBR forecasts have generally underestimated economic growth and overestimated public sector deficits. If that is the case, then – just as the Geoffrey Howe era of austerity was succeeded by Nigel Lawson’s boom and reductions in taxation – so the latter part of this parliament could actually see a reduction in the tax-raising plans.
One could think of the corporation tax rise as creating a ‘war chest’ which the chancellor might want to spend closer to the election. This does not mean that the CT rises will necessarily be reversed or mitigated. If other countries raise their rates of corporation tax to fill their fiscal holes, then the UK looks quite competitive again. He might use additional funds to deal with other pressing issues such as the reform of business rates or indeed funding social care.
It would therefore not surprise me if, just like the 1981 Budget, the 2021 Budget is followed by substantial tax reforms and potentially tax reductions.
Amongst the welter of commentary about a Conservative chancellor raising corporation tax as well as freezing a number of tax thresholds, a parallel has been drawn with Denis Healey’s Budget of 1974 which was the last one to raise CT rates. A better analogy would be to Geoffrey Howe’s Budget of 1981 which also froze tax thresholds and increased tax substantially.
In a number of ways, the position facing the Conservative chancellor in 1981 had important similarities to that of 2021. Unemployment was rising rapidly towards its peak of more than three million people. The economy was struggling to adjust to new realities. Businesses were closing at a rapid rate and it was doubted that various sectors of the economy would ever recover. The government had been forced to make a substantial number of U-turns and there was significant doubt over the direction that it would take. Public spending was increasing as welfare costs and the costs of supporting business went up. Battered by events, the government’s future looked uncertain.
Sir Geoffrey Howe, as chancellor, decided to tackle the budget deficit with a range of public spending cuts, but importantly, also tax rises. Up to that point he had been a very radical chancellor; in 1979, cutting the top rate of income tax for earned income from 83% to 60%. He almost doubled the standard rate of VAT in his first Budget as well. Most daringly, he abolished completely exchange control which was a temporary measure put in in 1939 as a wartime expedient but curiously had remained on the statute book ever since. A reminder that temporary measures curtailing freedom can become more permanent.
The 1981 Budget was seen as a turning point because it renewed the government’s commitment to fiscal responsibility. Indeed, the 1981 Budget froze tax allowances when inflation was considerably higher than it is today and therefore the fiscal drag effect was much greater. However, raising taxes was not seen as a desirable goal by Sir Geoffrey Howe any more than I suspect that Rishi Sunak views this as his aim. Apart from filling in the hole in the public finances, the tax rises were there to send out a clear message that if the public wants higher spending, then there will be a tax price to pay. In this Budget, the chancellor could have phased the increase in CT, but I think he opted to put it in one go to have a sort of ‘shock and awe’ affect.
How quickly could Rishi Sunak reverse course on tax?
The OBR figures give some pointers to this. As ever, the OBR is cautious about predicting economic growth once the pandemic has finished and the inevitable bounce back in the economy has occurred. It predicts a growth rate of 1.7% and 1.6% for 2023 and 2024 respectively. Previous OBR forecasts have generally underestimated economic growth and overestimated public sector deficits. If that is the case, then – just as the Geoffrey Howe era of austerity was succeeded by Nigel Lawson’s boom and reductions in taxation – so the latter part of this parliament could actually see a reduction in the tax-raising plans.
One could think of the corporation tax rise as creating a ‘war chest’ which the chancellor might want to spend closer to the election. This does not mean that the CT rises will necessarily be reversed or mitigated. If other countries raise their rates of corporation tax to fill their fiscal holes, then the UK looks quite competitive again. He might use additional funds to deal with other pressing issues such as the reform of business rates or indeed funding social care.
It would therefore not surprise me if, just like the 1981 Budget, the 2021 Budget is followed by substantial tax reforms and potentially tax reductions.
