Between Tax Hikes and Spending Cuts, Brits Are Clear

(Bloomberg Opinion) -- As Covid-19 continues to stretch the U.K.'s public finances, with the deficit possibly approaching 20% of GDP this year, the autumn budget is expected to address the wide gap between tax revenues and spending.

The impact is likely not just to be economic, but also political. Number Cruncher recently polled 1,000 British adults on the choices ahead. On the question of whether to prioritize tax rises or spending cuts, there is an across-the-board consensus, with 59% preferring higher taxes to 16% favoring lower spending, with the remainder unsure, and a similar pattern across demographics and partisanship.

That kind of consensus on the issue not only flies in the face of the reaction in the Conservative-supporting media recently when the prospect of tax cuts were mooted, as Martin Ivens wrote Monday. It is rare in Britain and represents a dramatic change from a decade ago and a unique challenge to a Conservative government that is trying to retain its reputation for fiscal probity while also handling the economic fallout from the pandemic and fulfilling promises to lower-income voters in the north of the country.

In 2010, a GlobeScan poll asked the same question, and found that 49% of Brits favored spending cuts, with 36% favoring tax increases. Since then, two important things have changed. First, substantial spending cuts were indeed made by David Cameron's Conservative-Liberal Democrat coalition government, with spending as a proportion of GDP falling to 39% from 46% between 2010 and 2019. With public services having been squeezed for so long, there is simply less to cut now.

Additionally, and no doubt as a result of long years of cuts that are particularly felt in local government services but also in health care and education, the public has little tolerance for further austerity. In 2018, our polling found that two in three respondents thought cuts to public services had gone too far.

This, combined with the difficulty for the Tories in running deficits (having repeatedly criticized the opposition Labour Party over its stewardship of the public finances during its time in office before 2010), leaves tax hikes as the default option. And yet the preference for tax rises over spending cuts isn't necessarily a sign of enthusiasm for paying more tax. The U.K. may not be like the U.S. in its aversion to big government, but it hasn't suddenly become mainland Europe either.

As such, there could be political pain on the way for Boris Johnson's government as a result of the fiscal tightening. And it is hardly an opportune moment, with Covid-19 cases rising, post-Brexit trade talks looking near collapse, an economy in recession and an opposition party under more capable new leadership on the attack.

In March, with the Coronavirus-induced "rally round the flag" in full swing, our polling gave the Conservatives an enormous 26-point lead over Labour. In our latest poll, that margin has been slashed to just four points, with likely voters backing the Tories 42% to 38%, which is within the poll's margin of error. And most of the fieldwork was completed before the Brexit withdrawal agreement row.

Worse for Johnson, and his more popular Chancellor Rishi Sunak, is that some of the most favored fiscal tightening measures have the greatest potential drawbacks. Among a list of potential tax rises, respondents preferred the so-called sin taxes (tobacco, alcohol) neither of which is a significant source of revenue. There was also a preference for capital gains tax (37%) which is larger as a source of revenue, but only somewhat due to exemptions. Corporation tax increases (supported by 55%) was the only popular option among those likely to generate substantial receipts.

Potential rises in income tax and national insurance (the U.K.’s social security tax) or Value Added Tax, the perennially unpopular inheritance tax, fuel duty and stamp duty (the tax imposed on property purchases), were all unpopular. And 8% rejected tax increases altogether, preferring spending cuts or increased borrowing.

The most popular spending cut would be to the foreign aid budget, supported by 67% of respondents, which has already been ruled out by the government. Notably, 42% thought budgets for the arts should be cut and 30% wanted cuts to the much larger defense budget, though that is a much less popular cut among Conservative voters.

Scaling back coronavirus financial support, which the U.K. still plans to do in the fall, was selected by just 10%, with other options of cuts from major public support programs -- state pensions, local services, education and health -- barely registering support at all.

Budgets, for all the attention they get, rarely lead to substantial increases in support for governing parties; but they can lead to substantial decreases. The circumstances place both Johnson and Sunak in an unenviable position. Their own political fortunes, and their party's, may well rest on getting this one right.

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

Matt Singh runs Number Cruncher Politics, a nonpartisan polling and elections site that predicted the 2015 U.K. election polling failure.

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