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Leader: How to pay for big government

As voters demand more of the state, the state must demand more of its wealthiest.

By New Statesman

“The era of big government is over,” declared Bill Clinton in his 1996 State of the Union Address. Over the years that followed, this belief was accepted as an incontrovertible truth by Western parties of both the centre left and the centre right.

But, as we have argued, in a new age of pandemics, climate crisis and great-power conflict, big government is back. At the UN Climate Change Conference (Cop26) in Glasgow, states debate ever more radical forms of intervention. The UK is a case in point.

After a decade of austerity, British public spending is now due to reach its highest sustained level since the pre-Thatcherite 1970s (settling at 41.6 per cent of GDP). As a consequence, the tax burden will rise to its highest rate since the early 1950s (36.2 per cent). To the disdain of its right-wing critics, the government has also reaffirmed its pledge to reduce carbon emissions by 78 per cent by 2035 and to eliminate them by 2050.

Such was the cognitive dissonance caused by Rishi Sunak’s Budget on 27 October that some commentators likened the Chancellor to his Labour predecessor Gordon Brown. Yet conservatism has long been compatible with big government. Tory prime ministers from ­Harold Macmillan to Ted Heath promoted a central role for the state in the economy. In Europe, Gaullists and Christian Democrats have often embraced interventionism.

The debate is no longer over whether governments should tax and spend, but how they should do so. Ageing populations, heightened voter expectations and green investment all demand a leading role for the state.

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[see also: Boris Johnson will only have himself to blame if Cop26 is a failure]

Faced with this, the Conservative Party has done what it once deemed unthinkable and increased direct taxation (National Insurance will rise from 12 per cent to 13.25 per cent next year). But by taxing earned income more heavily – including salaries as low as £9,568 a year – the Conservatives have missed a chance to position themselves as the party of fair taxation. Rather than squeezing workers after a decade of pay stagnation, Mr Sunak should have taxed the UK’s vast housing wealth to pay for social care.

Since the 1970s, house prices have risen by 166 per cent across the country and by 513 per cent in London. And yet for decades politicians have refused to tax this windfall. Even now the council tax bands are based on property valuations set in 1991.

There is an egalitarian case for wealth taxes but there is also a conservative one. By taxing unearned income more heavily and earned income more lightly, the government would promote enterprise and reward work. It would also boost growth by discouraging rent-seeking and encouraging investment in wealth-creating industries.

In an era of green taxes, it is even more essential for the wider tax system to be viewed as fair. As Adam Tooze, the economic historian, wrote of France’s gilets jaunes movement in last week’s issue, “The immediate trigger may have been an increase in the price of diesel. But the broad base of indignation was due to a raft of unequal social and economic policies adopted by Emmanuel Macron’s government.” (Most notably the abolition of France’s wealth tax.)

In the conclusion of his Budget speech, Mr Sunak showed his true ideological instincts. In an echo of Margaret Thatcher’s endorsement of Friedrich Hayek’s The Constitution of Liberty – “this is what we believe” – he declared: “Government should have limits. If this seems a controversial statement to make then I’m all the more glad for saying it, because that means it needed saying – and it is what we believe.”

The Chancellor emphasised that his goal was to “reduce taxes” by the end of this parliament. But he must reconcile this ambition with others: to “level up” the UK’s poorer regions, to improve public services and to achieve net-zero emissions. If the government is to cut taxes for some voters – as it should – it will need to raise them for others. Confronted by this task, Mr Sunak and his fellow finance ministers should not be afraid to break the taboo over wealth taxation.

As they seek protection from the climate crisis, economic stagnation and deadly viruses, voters are rightly demanding more of the state. But in return, the state must demand more of its wealthiest.

[see also: Boris Johnson’s perfect storm]

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This article appears in the 03 Nov 2021 issue of the New Statesman, Britannia Chained