Should we all just pay more tax?

That is how much extra income tax the average worker will pay if Chancellor Rachel Reeves goes ahead with rumoured plans to break Labour’s pre-election promise.

Higher earners will pay more and those earning less than £12570 pay nothing. It would raise about £8 billion.

Chancellors often break election campaign promises, in the last decade both Rishi Sunak and George Osborne did it. 

So what is all the fuss about?

The rising cost of living is biting deeper into household budgets and largely responsible for the Government’s low poll ratings. Businesses are still reeling from national insurance increases imposed on them last year whilst having to absorb higher prices, higher operating costs and paying workers higher salaries.

The hard numbers for the UK are really grim. The economy is barely growing (0.1%), inflation is high (4.8%) and productivity is flat (-0.6%). The Government doesn’t have enough money so has to borrow more to pay its bills and the interest on its very large debt (£2.9 trillion or 95.3% of GDP).

To put that in perspective the equivalent figures were £1.08 trillion and 69.6% of GDP in 2010 in the aftermath of the financial crisis when the coalition government was elected to fix the economy and launched years of austerity budgets and tough spending reviews.

The current gap between Government income and Government spending, the deficit, is growing all the time (£20.2 billion in September).

As inflation is high the interest payments on Government borrowing and debt are constantly increasing as are the benefits and pensions paid to people across the country which are linked to inflation.

To make things worse, if the money markets don’t think the UK has a credible plan to shrink the deficit over time then the vibes shift rapidly in a negative direction and the interest on our long term government debt bonds will increase making a very bad situation worse.

The Chancellor is like someone whose salary has gone down but the repayments on her huge tracker mortgage keep going up. All the household bills are increasing and she is hunting for the least worst option where to wield the axe, while the whole neighbourhood gossips about the sacrifices she should make and live her life differently.

An income tax increase is politically dangerous as it amplifies the message of broken promises and decreases the value of future promises. But it is simple and easy to understand. We all pay and higher earners pay more.

Arguably it is cleaner than the myriad of smaller measures proposed by think tanks and experts in order to place the financial burden on wealthier taxpayers via new wealth taxes, increased council tax, lower ISA allowances, property taxes or increased taxes for limited partnerships.

None of these will raise anything like the £20-30bn required but they will hit important engines of the economy hard, many of whom don’t feel that wealthy anymore.

Critics of an income tax increase will argue that there is too much waste in the public sector to make it truly the only option. That might be true but the recent struggle to reduce the welfare budget highlighted how hard that is for this Government.

The reality is that welfare spending and NHS budgets will only continue their steep upward spending curve. The size of the UK debt and deficit has also been hit by external shocks like the 2008 financial crisis, the Covid pandemic and the Ukraine war that led to Government spending £78.2 billion subsiding energy bills.

We can pay more tax income tax, but in return we need a long term plan to grow the economy and improve productivity as well as proper tax reform to simplify the system and build up a substantial savings reserve that can cope with the next external shock that will no doubt hit us in the years ahead.

James Sorene is a commentator and writer.

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