For the last 10 years, British headlines have been reporting spending cut after spending cut. Austerity has haunted the economic atmosphere. We have witnessed and experienced its side effects; the good and the bad. But with the current state of public finances and services, the economy looks ripe for change.
The success of austerity is ambiguous. Officially, the austerity programme was introduced by the 2010 coalition government in attempt to eliminate the country’s deficit. Though the Conservatives, particularly George Osborne, may have had ambitious targets, they have not completely failed. The government’s net borrowing in the tax year April 2017 to January 2018 is the lowest its been since the tax year ending in 2008. Looking at the chart below, the budget deficit has been declining since the austerity season began.
So if austerity has been such a success, why have people been so angry about it? It seems to be that declining debt doesn’t put money in people’s pockets. It doesn’t feed the person whose benefits were slashed. It doesn’t help fund our schools. It doesn’t make our streets any safer. There’s another side to austerity that isn’t a cause for celebration. We’ve had to watch our beloved NHS deteriorate into an overstrained, underfunded organisation fighting for dear life. The UK longs for her to return to the strength of her prime.
The question we need to be asking is: when will the government change fiscal policy? Though the budget deficit is declining, the government is still borrowing significantly more than it is raising through taxes. The Institute for Fiscal Studies (IFS) have warned that our budget deficit could reach £36 billion by 2020. Therefore, in no way has the concern for borrowing been dismissed. Our public services are in desperate need of funding. Something must change, and it looks like increasing taxes may be the answer.
Nobody likes to hear about the government raising taxes. We immediately think that more of our income will be snatched away, despite our wages already failing to keep up with the cost of living. Though income tax is the largest component of government tax revenues at 25%, it may not be most effective to rake it up aggressively. Attacking income tax can be counterproductive; the government risks discouraging people from working or looking for work, pushing many onto benefits.
Former Chancellor of the Exchequer George Osborne, for whom austerity was a personal project (Source: Independent)
The government may be better off spreading the tax increases across all or most forms of taxation. They could reduce personal allowance, which is the amount of income each individual is entitled to receive free of tax each year. Perhaps the most effective tax change would be to VAT. If the government extended VAT to a greater proportion of individual spending (it is currently around 50%), then they could raise a substantial amount of extra revenue every year.
With constant house price appreciation, the wealth of many households has been growing over the years. However, the tax on this wealth has not followed suit. This is but another opportunity for the government to raise revenue. In this context it is worth mentioning the Labour-proposed land-value tax, which could be considered much fairer than the regressive council tax system. Land-value tax would be a fantastic revenue-raiser but is an unlikely prospect with a Conservative government.
Considering the options for change in fiscal policy, it is clear that none of them are perfect. Every form of policy has its implications, trade-offs and setbacks. Taxation will always ‘hurt’ someone. But austerity has been hurting all of us for too long. It’s time the UK economy starts to look after itself.