Our Conservative Conference debate finds that austerity is over - but possibly just for now.

29 Oct 2019

Austerity is technically over but the spending squeeze on some government departments continues and a bad Brexit risks a return to fiscal belt tightening soon, concluded a panel at the CIOT‚ s Conservative Conference 2019 debate.

The fringe meeting, held at Manchester‚ s Midland Hotel, on Monday 30 September, was on the question ‚ Is austerity really over and how can the government pay for it?‚ Discussion ranged from the generational asset divide to the unintended consequences of tax changes to funding of social care. It was sponsored jointly by the CIOT, the Institute for Government (IFG) and the Institute for Fiscal Studies (IFS). Bronwen Maddox, Director of the IfG and a former Times journalist, was in the chair.

Paul Johnson, Director of the IFS, spoke first and remarked that austerity is over for now if you look at the spending commitments the Government have made (notably that no departments will face cuts next year). However, many people will not feel austerity is over because of the freeze on welfare benefits, for example, and spending on some government departments, such as Justice and DBEIS, as well as some service levels, will still remain well short of what it was in 2010.

Johnson went on to say that the group most protected from austerity were middle-income earners because, among other things, we have seen the withdrawal of the personal allowance from top earners and limits on their pension relief, while welfare reforms have hit the poorest. He pointed out that the size of the state has not shrunk as compared to six or seven years into the last Labour government. State spending is roughly where it was in the mid-2000s. However the shape of the state has changed ‚ NHS spending, for example, is a bigger proportion of state spending while local government spending is 20 per cent below where it was. He noted that the Office for Budget Responsibility would, at the next Budget, almost certainly say there would be a deficit of more than two per cent of GDP next year. Additionally, if Brexit does not go well, such as there being a ‚ no deal‚ exit, it could lead to a shrinking economy, leading to lessening tax take, he warned. All in all there was a good chance there might need to be an additional dose of austerity in the near future, he concluded.

Like Johnson, Kate Andrews said austerity had disproportionately hit some people such as the young and those on welfare, but hardly touched others, such as those with ‚ nice pensions‚ . She observed that, overall, spending had been cut by only 0.5 per cent per annum during the coalition government. She added that the government has little room for manoeuvre on spending because it is still racking up the country‚ s debt.

Andrews, associate director of Institute of Economic Affairs, spoke broadly, saying it is time to debate how we fund the lives of older people, such as social care, because the ratio of working age people to pensioners is lessening in the UK. We should not assume tax rises are inevitable, she said, concluding that the problems with the Apprenticeship Levy and complaints about the impact of SDLT on the housing market show that good policymaking is as important as spending money. She said she would like to see tax cuts, but the government need to prioritise ‚ the right kind of tax cuts‚ , most notably those which would generate economic growth.

The next speaker was David Willetts, a former minister in the Major and Cameron administrations and now a Conservative peer as well as President of the Resolution Foundation‚ s Advisory Council and Intergenerational Centre. He agreed austerity was over, and drew attention to financial markets‚ willingness to lend money to the government at low rates. What makes a debate about austerity particularly interesting at the moment is the context of Prime Minister Boris Johnson‚ s strategy to move the party‚ s electoral base to ‚ vote leave‚ areas, he said.

Lord Willetts observed that the UK is at a turning point in its demography, with fewer working age people and more over 65 year-olds. Are tax cuts for pensioners and tax hikes for younger people sustainable, he asked. Should we pay for adult social care by putting more tax on younger people when their quality of life is not rising or should people pay for their own social care? He said this public spending pressure is here to stay. He suggested that the 2017 Conservative manifesto, with its policy to make people pay for their own social care, is a sign of things to come.

Willetts suggested we need to talk about the shape of the state, highlighting that UK priorities are different to other countries, such as higher spending on the NHS and welfare. We have a big state for older, mostly Tory, voters, he said, but a shrunken state for younger people.

John Barnett, Chair of CIOT‚ s Technical Committee, said if there were easy ways to get more money from the tax system they would have been taken up by now. He observed that every tax change prompts a behavioural reaction and generally tax changes will affect those at the bottom of the income distribution the hardest. Announcements that may sound simple often do not deliver the hoped for revenue. For example, Gordon Brown‚ s 2008 changes to non-doms, that were originally slated to raised £1.2 billion in the first three years (£0 in the first year; £500 million in the second year; £700 million in the third year). The statistics were not released until 2015 and, so far as we can tell from them, actually cost £1.9 billion (£1.2 billion in the first year; £400 million in the second year; £300 million in the third year)..

Tax is ultimately a legal discipline as well as ‚ perhaps even more than ‚ an economic one, reflected Barnett. Yet in the popular mind taxation tends to be thought of as about economics or personal finance. The typical BBC Budget-Day, having shown the Chancellor with his red box, will rarely cut to a tax lawyer pointing out the interesting changes to s721 (3B) rule 1(a) Income Tax Act 2007. Yet it is those changes at the micro-level of tax legislation which make billions of pounds of difference to the amount of tax raised, he argued. Even something as simple as raising tax thresholds, as the new Prime Minister recently proposed, has unexpected impacts ‚ on Scottish national insurance, on the amount of Gift Aid which charities get, on pension contributions, on doctors‚ willingness to work for the NHS and so on.

So what can be done? Barnett said improving the quality of tax law required some ‚ really boring, lawyerly stuff‚ such as long-term road maps setting out clear directions for areas of tax policy, effective and wide consultation, phasing changes in with due notice, resisting demands from special interest groups which add to complexity, and post-implementation review. He said the CIOT/IfG/IFS report Better Budgets set this out in more detail.

Barnett suggested that there were a number of reliefs in the tax system which were more generous than their underlying policy objective required. These included giving both CGT and IHT reliefs on the death of business-owners and ‚ although it might not be popular with a Conservative party audience ‚ granting exemption from CGT rather than a rollover when a person sold their main residence (David Willetts described this last remark as an ‚ act of unprecedented bravery at a Conservative Party Conference‚ !)

Barnett stressed that these were personal views rather than CIOT policy. He also queried why we encourage wealthy foreigners (non-doms) to come to the UK but then discourage them (the remittance basis) from bringing their money with them ‚ a perverse incentive which appeared entirely contrary to the UK‚ s interests.

Powerful panel (left to right): Barnett, Andrews, Maddox, Lord Willetts and Johnson)

In the question and answer session, Lord Willetts remarked on the rise in asset wealth in relation to UK‚ s GDP. If taxes have to rise, the government should look at ways to tax capital, he said. This was morally superior to putting an increased burden on younger workers he said. The peer also complained about the ‚ horribly‚ regressive council tax and suggested a reform of that tax to fund adult social care. He also suggested that national insurance could be in need of reform.

A Conservative councillor mused that the party‚ s opponents have traditionally couched their spending and tax proposals in moral terms while Conservatives have put them in economic terms. Should we change our approach and start putting the case for the tax changes we would like to see in moral terms, he wondered. Willetts said he was with the questioner until he had mentioned IHT as an example of taxation that was immoral.

Kate Andrews agreed with other members of the panel that the UK tax code is too complicated and needs an overhaul. Tax needs to be transparent, devolved and simplified, she said. Andrews floated scrapping stamp duty land tax and introducing a land value tax. She said that the country needs an honest debate about how to pay for an ageing population and suggested devolution could be a way to manage and pay for adult social care. In response to another question she was critical of the administrative failings around universal credit and its ‚ poorly funded‚ rollout.

Paul Johnson observed that in the past 20 years there has been a change in how youngish (30-something essentially) middle income earners feel. In the past these people ‚ in the middle‚ were typically home owners and felt wealthy, now they typically rent and feel poor. This affects voting patterns among other things. Johnson also noted that auto-enrolment is essentially a savings rather than a pension vehicle. Along with the end of defined pension schemes, we have ‚ destroyed‚ pension savings in this country ‚ something that Britain was once renowned for, he said.

John Barnett said we could not consider how we tax houses without thinking about how we tax other assets. He also criticised the tax system for the number of things it tries to achieve. He had counted at least 11, from monetary policy to social policy to correcting market failures.

The 30 September 2019 event was attended by around 110 Conservative Party members, representatives of business and think tanks, journalists and other conference goers.