Money blog: Most hated taxes revealed – and those that Britons think are fair enough | UK News

In spite of all the largesse about potential tax cuts in the spring budget, the public finances remain in a parlous state, reflecting the scars of both the pandemic and, further back, the global financial crisis. 

The Office for Budget Responsibility (OBR) expects government borrowing for the 2023-24 financial year to come in at £123.9bn, falling to £84.6bn in 2024-25 – the fiscal year in which a new government is expected to take the helm. Even if the figures come in better than expected, as they have this financial year, it is still an unenviable inheritance for any incoming government.

The Institute of Fiscal Studies (IFS) observed last week: “The next government is likely to face some of the most difficult economic and fiscal choices the UK has faced outside of pandemics, conflicts and financial crises.”

It points out that taxes are at record levels for the UK while a combination of high interest payments on the national debt and low growth will make it harder than at any point since the 1950s to reduce debt as a share of national income.

With spending on the NHS and education ring-fenced, the implication is that there will be real-term spending cuts elsewhere, which threatens to make life hard for whoever is chancellor come spring next year – not least amid growing evidence that the UK needs to raise defence spending in the face of geopolitical tensions.

That said, the fiscal position is improving, as OBR forecasts make clear. That largely reflects the fact that the government has sought to be disciplined on public spending while increasing taxes dramatically.

Chancellor Jeremy Hunt has it in his power to make life harder for his putative successor Rachel Reeves. Spending more or taxing less now would reduce her ability to deliver on big-ticket Labour pledges and most notably its pledge to invest £28bn annually on low-carbon infrastructure projects. Ms Reeves herself has said that Labour will put a greater priority on its fiscal promises.

The language used by the IFS, though, is striking particularly given some of the dire situations with public finances that previous governments have inherited.

Economies inherited by new governments

The coalition government, for example, received a dreadful fiscal inheritance from Gordon Brown‘s outgoing Labour government. In 2009-10, the last financial year before the coalition came to power, the budget deficit stood at 10.1% of UK GDP – a consequence of government tax receipts (particularly from the financial services sector) collapsing during the global financial crisis.

The then-Chancellor George Osborne‘s response was to implement an austerity programme that was maintained by his predecessors. It brought the deficit down to just 2% of GDP by 2018-19, before the pandemic turned public finances upside down. 

But the consequences of that fiscal discipline have been felt in a number of areas – like the courts system – which unlike the NHS did not benefit from their budget being ring-fenced.

Mr Brown himself had benefited from a decent fiscal inheritance when, in 1997, he entered the Treasury after Tony Blair’s electoral landslide.

From the moment the UK was bundled out of the old European Exchange Rate Mechanism (ERM) on “Black Wednesday”, 16 September 1992, the UK economy enjoyed a period of unbroken economic growth that brought down the deficit sharply to just 4% of GDP.

The national debt, which now stands at 98% of GDP, was just 45% of GDP when Ken Clarke handed over the reins to Mr Brown. Not that the latter was especially appreciative. An STV camera crew, documenting Mr Brown’s first days in the Treasury, caught him snapping at Treasury mandarins who dared to point out to the new chancellor the favourable situation he had inherited from his predecessor: “What do you want me to do – write a thank-you letter?”

Mr Brown stuck to Ken Clarke’s tight spending plans – Mr Clarke himself later chuckled that he would not have done so had John Major won in 1997 – to such a degree that, by the 2000-01 financial year, the UK government was actually running a surplus. It has not done so since.

Further back, when Margaret Thatcher’s first Chancellor, Sir Geoffrey Howe, entered the Treasury in 1979, addressing the budget deficit was one of many challenges. 

Bringing down inflation and addressing the UK’s chronic lack of competitiveness at the time were at least as great priorities. Moreover, by the time Sir Geoffrey entered the Treasury, the deficit was falling.

The turning point had come in 1976 when, after the national humiliation of the UK receiving an IMF bail-out, Prime Minister James Callaghan told that year’s Labour Party conference: “We used to think you could spend your way out of recession and increase employment by boosting government spending.

“I tell you, in all candour, that that option no longer exists. And in so far as it ever did exist, it only worked on each occasion… by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”

His speech remains one of the great post-war political moments in the UK – the moment the government faced up to the need to tackle inflation.

It meant tough decisions – and it is fair to say that Denis Healey, Mr Callaghan’s chancellor, did not as a result indulge in pre-election giveaways in 1979. There was no scope to do so.

Pre-election giveaways

In fact, pre-election giveaways are a relatively recent phenomenon. Labour’s Roy Jenkins, the first chancellor since the war to actually begin repaying the national debt (something only achieved subsequently by Gordon Brown and Nigel Lawson), could have indulged in them in 1970 but chose not to on the assumption that the public had already got the message that the economy was recovering. 

He was wrong. A rogue set of trade figures and England’s shock elimination from the 1970 World Cup at the hands of West Germany, days before the country went to the polls, unexpectedly saw Edward Heath return to power.

The inheritance he left in 1974 was a poor one. Anthony Barber, chancellor for most of the Heath government, had embarked on a so-called “dash for growth” that merely led to a wage-price spiral and surging inflation. The two 1974 elections, with the benefit of hindsight, were good ones for the Conservatives to lose.

Among the worst inheritances an incoming chancellor has received was the one Mr Callaghan himself got when Labour was elected under Harold Wilson in 1964. His Conservative predecessor, Reggie Maudling, had embarked on a period of expansion that had landed the UK with a large current account deficit (when imports exceed exports) that was putting pressure on the pound. 

Mr Maudling told Mr Callaghan, as he left the Treasury: “Sorry, old cock, to leave it in this shape.” Mr Callaghan thought he had been referring to the state of the chancellor’s office rather than the economy. The Wilson government was eventually obliged, in 1967, to devalue the pound.

It was, incidentally, the Maudling quip to Mr Callaghan that partly inspired the outgoing chief secretary to the Treasury, Liam Byrne, to leave a note to his successor in 2010 with the words: “I’m afraid there is no money”.

So, while it may look as if the next government will face a tough fiscal inheritance, so have plenty of its predecessors.