When inequality is this high, all choices become bad
Speculation on the UK Budget this month has leaned on the tensions the UK Government’s faces as all of its choices seem to face intractable opposition.
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This month, the UK holds its annual budget and there is already a lot of speculation over which direction things will shift. The UK’s finances are strained, yet more cuts and Austerity will be unbearable. Inflation is too high, yet job or wage cuts to “restrain” spending demand will be devastating. The Government has tied multiple arms behind its back by promising to not increase taxes on “ordinary workers”, yet last year’s workaround (to increase employer’s National Insurance) has been extremely harmful especially to small service sector organisations whose outgoings are largely based on employment costs, and repeated demands for tax increases for the wealthy – and outright wealth taxes – are considered by the Government to be politically beyond the pale. As would be restraining the financial sector that has largely been the cause of all of this.
One intriguing idea that has come up is to increase income tax by a couple of percentage points but to decrease employees National Insurance by the same amount. This is potentially a good idea, though I’ll explain how it could be handled very badly as well and why even if it isn’t, there’s a good chance that the UK Government won’t pull that lever either.
For a good majority of people in work and on median or above median salaries, this kind of policy would make little to no difference at all. The two tax changes would offset each other and people would have to look quite closely at their payslip to notice anything had changed.
There are two groups, however, for whom this would not be the case.
The first would be the very wealthy. It’s not widely known, but National Insurance is quite a regressive tax. Unlike income tax where the marginal rates generally get higher as you earn more, for those earning above about £50,000 per year in the UK (which is about the top 20% of earners and closer to the top 10% in Scotland) then NI drops from 8% in every additional pound earned to only 2% in every additional pound earned.
These high earners would see the same income tax vs national insurance tax offsets as more moderate earners but the signal of the policy would be “this far and no further”, which would act against any desire to increase income tax on the very rich (say, the top 10%, top 5% or top 1%).
“This would all have been made easier if the UK was a less unequal society. Too many very rich people leverage their wealth to magnify their power far beyond the single vote they have an equal, democratic society”
There will, undoubtedly, be losers. Employees who are over the state pension age – more and more older people are having to work to offset the low state pension and low wages before they retired – would see their income tax increase but not see a corresponding decrease to National Insurance because they are already exempt. Certain self-employed people too may see complications with their already complicated tax circumstances.
And the complications compound when it comes to devolution. Income Tax is largely devolved to Scotland while National Insurance is reserved. So any change by the UK Government on the latter will be reflected automatically in Scotland. However, it will be up to the Scottish Government to “pass on” any increase to Income Tax to Scottish employees. It might well be tempted to not do so, but the sting in the tail of the “Fiscal Framework” that will see an increase in Income Tax at a UK level causing a cut to the Scottish Government’s Block Grant – the Fraser of Allander Institute estimates that a 2% increase could cause a cut to the Scottish budget of £1bn per year. This will greatly increase the pressure on the Scottish Government to “use” its devolved powers to simply mirror UK policy. Of course, this will lead to a political fight no matter if they do or not.
This would all have been made easier if the UK was a less unequal society. Too many very rich people leverage their wealth to magnify their power far beyond the single vote they have an equal, democratic society (ask if the recently passed Land Reform Bill works better for the 421 people who own half of Scotland or for the rest of us). Meanwhile, too many poor people are paid so little that small tax cuts do little to help them while small tax rises can be the straw that breaks them – greatly constraining policy either way.
Despite these concerns, the plan to shift working tax from National Insurance to Income Tax is fundamentally a good one. There are far too many ways to collect money in the UK without it being classed as “income” so I believe that NI and other taxes like Capital Gains tax really should be folded into the definition of “income” (“the definition of income” was very deliberately left on the reserved list during the post-indyref devolution reforms precisely to prevent Scotland unilaterally doing something like this) but this doesn’t seem to be the plan here. UK Labour seem merely to be trying to get through this year before tackling the problem of getting through next year. Everything else is secondary.
We can say though that in a world of bad choices in every direction, we are about to see who the Government – with its plunging ratings in the polls - thinks it can and cannot get away with annoying.
We shall have to see later in the month if the UK Government goes for this particular proposal or it they move in a different direction. Unfortunately, such is the nature of speculating on a budget before it happens is never going to be more substantial than trying to catch smoke in your hands. Once we see the actual decisions we can see what impact they’ll have in Scotland and what the Scottish Government will be able to do in response.
