Bull: are tax policy and populism pulling in opposite directions?

Announcing unexpected tax changes on Budget day without prior consultation will always be open to public opposition, as has been seen in the past with the majority of unwelcome taxes being abolished just days later, explains George Bull, senior tax partner at RSM

The UK’s tax system exists for two purposes. First, to raise money for what the country wants to do. Second, to redistribute wealth.

Nobody really likes paying taxes, but most people accept their obligation to pay the right amount of tax on time. However, new taxes are almost universally unwelcome. A government that makes a mess of introducing a new, unpopular tax may lose voter support, no matter how sensible the tax might be.

The 1997 Labour government was acutely aware of this and used focus groups to test voter sentiment in the formulation of new policies. More recently, the March 2012 Budget proposal by the then Chancellor of the Exchequer George Osborne to simplify the tax treatment of hot takeaway food by charging VAT at 20% in all cases was so unpopular that it was dropped in May 2012. But the damage had been done, with ‘pastygate’ and ‘omnishambles’ entering the English lexicon.

Recent history is full of other examples. For example, the May 2017 Conservative Party manifesto contained proposals for social care. These were quickly labelled the ‘dementia tax’, with the prime minister performing a dramatic U-turn and dropping the policy six months later.

Some unpopular proposals have proved so politically toxic that they lasted only a few days. For example, in the Spring Budget of March 2017, Chancellor of the Exchequer Philip Hammond proposed modest changes to National Insurance Contributions (NICs) for the self-employed. Immediately branded the ‘white van man tax’, Cabinet panic meant that 48 hours later the proposals were history.

Weak governments with slender majorities will always struggle to enact new taxes, no matter how compelling the fiscal case may be. Unwelcome changes announced on Budget Day without prior consultation will inevitably be subject to opposition. The ‘rabbit-out-of the-hat’ school of tax changes is almost always doomed to failure. It is therefore incumbent on the government to make its case for change, to take soundings, to do its best to carry the public (as well as its own MPs) with them and then stick to its principles once the change is announced.

There should always be scope to improve the proposals in response to consultation, but panicking and dropping proposals at the first sight of serious opposition does nothing to meet the policy needs that have been identified.

The tussle between populism and policy matters now than ever before. The UK urgently needs to:

  • increase the resources available to the NHS in a sustainable fashion;
  • resolve funding for social care;
  • face up to the role which the skewed NIC system plays in fostering the gig economy and its attendant problems.

The general openness to pay a little more tax to help fund the NHS is an encouraging sign, although most people want to be absolutely certain that the extra money they pay will indeed find its way to the health service. When the chips are down, the British public know when they are going to have to dip into their pockets to pay more tax for specific services. But they do not automatically trust politicians to keep their promises.

Recent history should be a warning to any Chancellor that people do not respond well to shock tax changes. With the pressing need to resolve massive issues such as NHS funding, social care and the gig economy, all of which have a tax dimension, we urge the government to engage in an open debate about what the future tax system might look like rather than pulling more short-lived rabbits out of the Budget Day hat.

About the author

George Bull is senior tax partner at RSM

George Bull |Tax consultant, RSM

George Bull is a tax consultant and former senior tax partner and head of RSM's Professional Practices Group. He is primarily involv...

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