What governments decide to do is, of course, very important. But so is what they dare not do, what they regard as out of the question, unthinkable, impossible. Particularly if they make a point of gathering journalists in a room and telling them they’re going to do something – before finally deciding to back off. For just over a week after her curious pre-Budget press conference on 4 November, Rachel Reeves was audibly preparing to cross a line no chancellor has felt able to transgress since Denis Healey, in April 1975. She was bracing herself to break what commentators have solemnly proclaimed the “Fifty Year Taboo”. She was about to raise the basic rate of income tax.
The chance to dress up Starmer’s Labour in the sorry costumes of the 1970s, from rocketing inflation to the IMF crisis, produced audible slavering from certain British newspapers. Alas for them, it now looks as though the Budget will instead involve the standard smorgasbord of of small specifics, plus freezing thresholds. The taboo will stay, as invincible as ever. But rather less attention has been paid to why changing the basic rate has been a political unthinkable since the Decade of Unfortunate Hair.
One way of reading Healey’s decision (see his biographer Edward Pearce, and more recently the ex-director of the Institute for Fiscal Studies, Paul Johnson) is that it heralded the germination of a tough, fiscally realistic new political era. According to this reading, the seed Healey planted was nurtured by prime minister Jim Callaghan in his 1976 conference speech, which turned away from post-war Keynesianism – declaring the idea that you could tax-cut and “spend your way out of a recession” to be an “option that no longer exists” – before being brought to fruition by Margaret Thatcher. And in the sense that Healey was trying to tackle an inflation rate that in 1975 was nosing 20 per cent, there is something to this. But it is not how Healey remembered that budget. And if raising the basic rate were really the harbinger of a new era, why has no one ever dared do it again?
It makes at least as much sense to see Healey’s choice on tax back then the other way round. It was one of the last attempts to shore up the post-war settlement and its priority on protecting working people, in the face of the 1973 oil shock and rocketing prices. He was sticking to a different taboo, not on raising income tax, which tended to hit the middle classes, but on the more regressive value added tax, introduced in 1973. On taking office in 1974, he had cut the main VAT rate from 10 per cent to 8 per cent. And in 1975, he refused to push it back up again.
Healey, after all, was part of a government which came to power committed to an “irreversible transfer of wealth and power to working people and their families”. He argued that by using tax changes to redistribute wealth and income accordingly, the government was keeping its side of its new “social contract” deal with the unions: Labour’s promise to adopt economic policies the unions supported, in return for restraint on wage demands. Meanwhile one of his cabinet colleagues, John Silkin, was planning to nationalise land; another, Tony Benn, was pushing for import controls. Healey himself had talked of wanting to “squeeze property speculators until the pips squeak”. True, the IMF crisis the following year heralded a rejection of Keynesian methods, but even this can be overstated. Healey and Callaghan resisted the IMF’s more austere demands for cuts, remained committed to restoring full employment, and persisted with industrial strategy, regardless of Thatcher’s mockery.
The taboo Reeves was gearing up to break was really introduced in 1979, when Thatcher’s new chancellor Geoffrey Howe cut the basic rate from 33 per cent to 30 per cent – and near-doubled VAT to 15 per cent. This deliberately shifted taxation from income to spending, as the Conservatives had promised (though Britain’s major domestic trade associations were rather startled that the hike in VAT was quite so high). It was a sharp political shift, lightening the tax burden on the middle class and forcing more of it onto the backs of the working class. The taboo this introduced was on using the tax system to put working people first, demolishing a pillar of the post-war settlement. In 1991, another Conservative chancellor, Norman Lamont, pushed VAT up to 17.5 per cent. In 2010, George Osborne bumped it up again, to 20 per cent.
Along the way, in 1988, the other post-war norm Healey had maintained – an income tax system with many levels – had been flattened out by Howe’s immediate successor, Nigel Lawson. This left just two rates, at 25 per cent and 40 per cent, which made the system even less progressive.
The taboo on raising income tax was not fully entrenched until 1992, when the Conservatives unnerved Labour with their attacks on its “tax bombshell”. Rather optimistically, shadow chancellor John Smith decided to trust to the fairness and good faith of the 1990s media, presenting a “shadow budget”, solemnly delivered against a wood-panelled backdrop at the Institute of Civil Engineers. This set out how Labour would raise tax on the better off to pay for higher pensions and child benefit. On that night’s 6 o’clock news, a BBC correspondent lauded it as a political win. But by the next bulletin three hours later, the BBC’s political editor was warning that it painted a huge target on Labour’s back – which the Tories then gleefully bombarded.
But we should be clear about exactly what orthodoxy was entrenched that day. It was not the final triumph of the wave of revulsion against paying tax that had arisen in the 1970s – because, as Rosa Hodgkin has identified, there was no such wave. Public attitudes to tax remained relatively consistent in their begrudging acceptance from the 1940s to the 1990s. What actually happened, Hodgkin argues, is that, roughly in the period between Lawson’s tax-flattening budget in 1988 and Smith’s bid to do the opposite four years later, a myth developed in the media. This alleged that the run-up to Thatcher’s 1979 victory had seen a mass rejection of Labour’s pip-squeak-inducing taxes. What happened after 1992, Hodgkin concludes, was that Labour accepted the taboo on raising income tax that this tale encoded. That orthodoxy has been with us ever since.
This rather gives the lie to the claim that the Thatcher project forced British politics to look fiscal facts firmly in the face. As Andrew Dilnot has noted, between 1945 and 1975, “taxes went up explicitly to fund increases in public spending”. Thatcher kept taxes steady by sustaining spending on core services, but cutting back on such fripperies as transport and social housing – helped, of course, by the torrent of black gold from the North Sea. But crucially, from the 1990s on, tax policy has increasingly been conducted by means of smoke and mirrors. Labour promised in 1997, 2001 and 2005 not to raise the basic rate. And so long as that most visible of taxes stays still, it seems, it doesn’t really feel like tax is going up, no matter how much thresholds are frozen. Labour did raise national insurance in 2001 to revive the NHS – but only after that year’s election, when it did not explicitly say it would do so.
The basic fallacy here – the illusory promise that we can have Scandinavian public services with American tax rates – fits with the wider rejection of the rough-and-ready forthrightness of post-war politics, when political fights were played out more in public. Witness Healey in 1976, facing down angry hecklers at Labour party conference. In its place, the 1980s and 1990s ushered in the politics of euphemism. But this approach in its turn has long been dying before our eyes.
For just over a week, it looked as though the chancellor was finally going to break away from all that, defy Howe’s old taboo, and raise a big chunk of the funds our public services need by pulling the most progressive lever the system offers. After all, the income tax taboo is not the only one this government faces. The attempt to add further cuts to the welfare bill to meet the OBR’s downgraded forecast collided with another such limit in the other direction, courtesy of the PLP.
As the story of the 1970s demonstrates, this is how things change: the unavoidable becomes unthinkable, the unthinkable becomes unavoidable. Back then, mass unemployment became tolerable because high inflation and endemic strikes became intolerable. In that context, Howe’s shift on tax was relatively uncontroversial, but only because it came after a decade of battles to keep the old orthodoxy alive. And battles like that generate a lot of losers. So perhaps it shouldn’t be surprising that Reeves finally decided to leave the taboo and its attendant illusions in place. It may yet prove that more upbeat forecasts meant she didn’t have to take a step that would undoubtedly have been a huge political risk.
But one big reason it’s a risk is because a manifesto that promised “Change” also promised not to change the basic rate. Much as the chancellor spoke of being “honest” in that pre-budget speech, she is trapped between a choice of dishonesties: break the manifesto pledge, or maintain the standard approach to taxation which refuses to look the public in the eye. Freezing thresholds may not raise the rate of tax on working people, but it will still take more of their money. And raising taxation broadly and simply might have helped make the case for raising more revenue from property wealth.
At some point, the chancellor may finally have to accept that caution is as risky as risk, and that doing the thing that has been unthinkable for 50 years is unavoidable. Having signalled that she was going to do exactly that, there might have been a political benefit for just taking a bold decision and visibly sticking to it. If a government that won an Attlee-size majority on the promise of change won’t dare to break with the past, who will?
[Further reading: Meet the bond market vigilantes]
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