Taxing choices: Taking the public’s temperature ahead of the budget

Only history will reveal what the current chancellor, Rachel Reeves’, pre-budget routine looks like. But whatever it is, it will now be in full flow. With less than two months to go the Treasury will be kicking off preparations for the big day and media speculation is already ramping up. 

The government is facing a difficult economic context, with low growth (which in turn reduces tax revenues), stubbornly high inflation and significant pressures on public services. Despite raising significant revenues at the last budget, the chancellor will need to raise more at this budget, even just to stand still, in part given recent policy u-turns and an expected OBR downgrade to growth.

As speculation grows as to how she will raise additional revenue, so too have fears of bond-market wobbles and fragile business sentiment. These are important dynamics for the chancellor to consider. But just as important is public opinion. After all, it was voters who put this government into office – and who will ultimately determine if it stays there.

This downward trend in support for higher taxes and higher spending may well be in part a reflection of the ‘thermostatic’ nature of support for a bigger state, meaning when the state grows, support for more spending and tax shrinks (and vice versa). But our polling suggests it is also the result of more complex factors including cost of living pressures (people feeling less well off) and low trust in the current government. 

This implies that the government has less room to make the case for additional tax revenues than it has done in the past (though not none, as we set out in the rest of this blog). This means where it does raise additional revenues it will have to clearly set out, in ways that are visible to citizens, how this is being invested to deliver better outcomes, to build trust in government's ability to spend tax revenues well. 

Insight 2: People want the government to tax the rich properly before they ask them to contribute more

These shifts in public support for tax and spending do not mean that there is no support for higher taxation at all. Voters are supportive of higher taxation on some groups who they perceive as not paying their fair share or benefiting unfairly from the status quo. This is partly justified: the UK tax system is highly imbalanced and full of loopholes. For example, as it stands working people currently may pay a higher effective tax rate than a millionaire investor, or a person in Blackpool might pay higher council tax than a someone living in a mansion in Mayfair. 

The most popular tax rises are those that fall on large banks, social media companies, as well as high earners and those with a high stock of wealth. Support for tax increases falls rapidly when it affects those who voters see as ‘ordinary people’ - pensioners, small businesses, farmers, petrol car drivers, the average person in the UK and ‘you personally’ (figure 3).

Of course, some of these ‘narrow’ taxes come with a trade-off: they may hit economic growth. But this is not true for all of them. For example, reforming property taxation can make it easier for people to move to the places where there are job opportunities. And, as the IFS have argued, reforms to capital gains tax could increase investment and growth whilst raising more revenue (though we must recognise that even substantively pro-growth taxes may have an effect on business sentiment which could feed through to growth). 

This means, in seeking to find extra tax revenue, the chancellor will have to finely balance taxes which are popular, with the government’s mission to deliver higher economic growth. In practise, IPPR’s work suggests in many cases this trade-off is not as harsh as often perceived: many reforms, such as those listed above, could be designed to be pro-growth – and ultimately help deliver a fairer and stronger economy. 

Insight 3: The public only support tax rises for a purpose

But, if the chancellor raises tax at the budget, it must be for a purpose. This doesn’t negate the need to fill the fiscal hole left by recent policy u-turns (on welfare) and a likely OBR growth downgrade. However, the public are unlikely to support higher taxes on this basis alone. They rightly want to understand what they are paying more tax to achieve. 

To help understand on what basis the public would pay more tax, we tested several ‘frames’ – meaning narratives explaining what the budget is seeking to achieve – to see which ones were most popular with citizens. The context suggested was that the government would have to include ‘broad’ tax increases on ordinary people. 

These frames included the following.

• The world has changed: a budget to manage the changing world (Ukraine, Trump etc).
• Defence: a budget to fund the additional costs of defence (Ukraine/Russia).
• Cost of living: a budget to reduce bills on working people.
• Fairness: a budget to tax unfair wealth and make it easier for working people.
• Efficiency: a budget to make the hard decisions and run the government well.
• Honesty: a budget to fix public services where we all chip in a bit more.

These were tested against counter messages such as the following.

• Cost of living: people are already struggling, they can’t afford to pay more tax.
• Government waste: the government should cut waste before asking us to pay more.
• Growth: tax rises hurt economic growth.
• Immigration: increased costs of immigration and asylum are the reason we need to pay more tax.

Our findings show, worryingly for the government, that there is no pro-message that convincingly beats the anti-messages in a scenario where ‘broad’ taxes are levied on voters – though we also find that some voter groups are likely to punish a Labour government more for failing to deliver visible improvements in their lives than for breaking a manifesto pledge on broad-based taxes. 

However, the narratives citizens find most convincing are ‘fairness’ (asking the wealthy to pay their share) and action to tackle the ‘cost of living’ (to support working people with rising bills). This implies two crucial tests for the budget.

1. The government must demonstrate that the wealthy have been asked to shoulder the burden too. This is particularly important if working people have been asked to contribute more. The UK tax system is unbalanced and full of loopholes – and the public will expect government to have addressed this and targeted those with broader shoulders first. Crucially, taxes focused on those with broader shoulders must be visible and understandable to the public at large, otherwise the government risks a sense of unfairness taking hold. IPPR has historically called for efforts to equalise tax rates on income from wealth and work, reforms to make property taxation fairer, efforts to claw back quantitative easing losses from commercial banks and increases on harmful industries such as gambling. These changes are primarily closing loopholes and inefficiencies in our tax system, and many are pro-growth.
2. People must feel they are getting something out if they are putting more in – launch a ‘war on bills’ to visibly tackle the cost-of-living crisis. Revenues raised from taxation, in addition to filling the fiscal hole and building up fiscal headroom, should go towards eye-catching policy initiatives that will tackle bills including for energy, food and housing. A collection of well-judged policy interventions can act as proof points that the government is on working people’s side. A similar strategy was prosecuted effectively by Albanese in Australia. These measures may not always require significant extra spending but also involve better regulation (which are often more popular). Making this visible via consistent, relentless messaging will be crucial. 

These policies should be carefully designed – and be combined with pro-growth measures – to ensure this is a budget for ‘fairness and growth’.