In 1909, one of Alistair Darling’s predecessors as chancellor, David Lloyd George, was faced with a potential fiscal crisis. His response was the most radical – and arguably the greatest – UK budget, through which he established the principle of a progressive tax system to finance public spending. The budget was such a success that it was given a soubriquet – the ‘People’s Budget’.
100 years later, Alistair Darling has to present a budget at a time when the UK economy is deep in recession; unemployment is widely expected to rise to three million; and the fiscal deficit will be over 10 per cent of GDP, even if he chooses to do nothing. His response should be to emulate the boldness David Lloyd George demonstrated 100 years ago.
To counter the recessionary forces in the economy, the chancellor should announce a limited package of measures targeted mainly at those on low incomes – the ones who are most likely to spend any increase in their disposable incomes. This package should comprise a £1,000 increase in the personal tax allowance and increases in benefits and child tax credits to ensure that the government achieves its goal of halving the number of children in relatively low-income households by 2010-11. This will cost around £10bn in total.
To help close the gap between revenues and current spending over the medium-term, the chancellor should announce tough limits on the growth of public expenditure. He should, however, make it clear that these cuts will be made in a way that protects those on lower incomes and ensures extra resources will continue to be made available for priority areas such as education, health and childcare. This will mean tough decisions in other areas. Major projects, such as the replacement of Trident submarines, will have to be cancelled.
The chancellor should also reaffirm Lloyd George’s moral case for progressive taxation to finance public spending. He should say that it is inevitable that taxes will rise and he should set out the principles that will guide the search for additional revenues. These should be fairness, a more progressive tax system and environmental sustainability.
The chancellor should also set out some specific changes that will be implemented from 2010. He should increase the top rate of tax to 50 per cent for taxable incomes of more than £150,000. At the same time, to ensure the rich pay their fair share of taxes, there should be a major clampdown on tax avoidance, tax reliefs and tax havens. The chancellor should also reverse the change to inheritance tax announced in the 2007 Pre-Budget Report.
The chancellor should announce plans to examine the feasibility of a tax on carbon emissions and a land value tax.
Raising existing taxes and introducing new ones may sound like a sure route to political unpopularity, but the fiscal position leaves the chancellor with little choice. It may reassure him to know that 100 years ago David Lloyd George’s ‘People’s Budget’ helped to revive the Liberal party’s political fortunes, showing that boldness can deliver votes as well as economic results.