Boris’s Tax Hike Is a Defining Moment for U.K. Conservatives

(Bloomberg Opinion) -- There are moments in a government’s lifetime that symbolize a change of ideological direction. Last week U.K. Prime Minister Boris Johnson’s decision to raise taxes to pay for social care and bail out the National Health Service was one of them.

However worthy the objectives, the result will leave the country with the highest tax burden since 1945. Crucially for “Brand Boris,” it means that Britain has finally buried the post-Brexit idea of becoming Singapore-on-Thames — a free-wheeling, low-tax, light-regulation economy that sits offshore a high-tax continent. Critics on the Right are even charging that Johnson has turned the Conservatives into “Blue Labour,” a tax-raising party that’s focused on public services and tinged with nationalism.

However, the political logic behind the 1.25% levy on National Insurance — a breach of Conservative manifesto commitments — was sound in principle. The extraordinary times of the pandemic called for extraordinary measures. 

Hospital waiting lists have risen sharply as the health service focused on fighting Covid-19. Without extra money, thousands of patients could die from untreated cancers and other diseases. And the crisis in social care for the elderly has been a scandal for decades. Local councils have sharply cut capacity in affordable care homes as the central government cut their grants.

The measure was fiscally conservative too. Rishi Sunak, Johnson’s chancellor, vetoed borrowing more money for fear that the era of low interest rates may be coming to end, which would leave the U.K. vulnerable with debt at record levels. Another former Tory chancellor, Norman Lamont, compared last week’s levy to Margaret Thatcher’s unpopular tax increases in 1981, which stabilized the economy during an era of stagflation.

The difference is, no one was in any doubt that the Iron Lady’s eventual destination was lower taxes and supply-side reform. Free-spending Johnson, on the other hand, is made of more malleable stuff than iron. 

The broader political context is which way Britain faces post Brexit. Singapore-on-Thames was always a fanciful notion - the U.K. is a much bigger and more complex country than the Asian island state with its population of nearly six million - but it neatly encapsulated free market Brexiteers’ ambitions. Among its advocates were Sunak and his deputy at the Treasury Kwasi Kwarteng.

Independence against hostility from neighbors had galvanized Singapore. In Estonia, independence from Moscow allowed the political class to remake the country as a low-tax, technologically smart state. Could Brexit similarly fire up a U.K. mired in low growth and low productivity rates since the great recession of 2007? 

In Jan. 2017, then-chancellor Philip Hammond told the German newspaper Welt am Sonntag, “If Britain were to leave the European Union without an agreement on market access we could suffer economic damage at least in the short term. In this case, we would be forced to change our economic model.” Although free marketeers cheered, the interview was merely a (failed) negotiating ploy to frighten France and Germany into giving Britain better exit terms. Successive Conservative governments never went down that road.

Since Covid, the hopes of free market Brexiteers have been dashed one by one. The first act of the government was to cancel a planned reduction in corporation tax to 17% to pay for public services. Then Sunak announced he would raise rates to 25% in 2023, the first such rise in 47 years. U.K. business is by international standards already lightly regulated, but Johnson’s government put up minimum wages and promised no bonfire of European labor regulations. Covid prompted, rightly, a surge in state spending, which proved overwhelmingly popular with voters.

But even before the pandemic, a majority in both the Conservative and Labour parties had moved leftwards in supporting higher spending, especially on health. To keep power, Johnson pulled off the neat trick of running against the record of his Conservative predecessors and their austerity. “We are the party of the NHS,” Johnson boasted in the Commons on Tuesday -- these days, he is more heir to former Labour Prime Minister Tony Blair than Thatcher.

Of course, there’s still room for the “other” Singapore — not the low-tax regime but the smart state with high-quality public services.

The financial sector is one bright spot. Britain provides more sophisticated, flexible regulation than Brussels, and Brexit has done less harm to the City of London than feared. Last week Sebastian Siemiatkowski, the Swedish chief executive officer of Klarna, the $2.5 billion digital payments company pitched at young people, came to London to reassure financial media that the U.K. offered the best regime in Europe. London has further potential to become a regulatory leader in sunrise markets like pharmaceuticals testing, artificial intelligence and fintech.

However, attempts to reform public services have stalled. Secondary education in England, if not Scotland, has improved recently, but where is the fierce political will driving more change, greater excellence and digital training of the workforce? Billions more will be pumped into the health service after last week’s tax rise, but how will outcomes improve? When it comes to rates of survival from conditions like cancer, the NHS lags behind much of continental Europe.

A new popular consensus among voters may be arising, and, yes, it may be Blue Labour. But what worries Tory MPs is that at the next election, the real Labour party may be a more convincing advocate of moderate Labour policies than the Conservatives.

An opinion poll on Friday showed that the government is trailing Labour for the first time since January. Having thrown away their reputation for tax-cutting, the Tories, on recent polling evidence, have not become the party of the health service either.

The U.K. no longer benefits from easy access to the European single market either. The economy will have to run that little bit faster just to maintain recent rates of growth. How will that be achieved? Singapore-on-Thames was one idea. Beyond splashing cash, it is not clear that Boris has a better one.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Martin Ivens was editor of the Sunday Times from 2013 to 2020 and was formerly its chief political commentator. He is a director of the Times Newspapers board.

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