LostPassword asks did Liz Truss end the Thatcherite consensus?

One of the aspects of the Thatcherite consensus less often credited to the 1980s Prime Minister who looms large over British politics, was the practice of increasing the rate of Employee* National Insurance Contributions (NICs) and cutting the rate of Income Tax. In 1979, when Thatcher took office, the rate of NICs was 6.5% and the basic rate of Income Tax was 33%. When a tearful Margaret was ousted from Downing Street, NICs had increased to 9% and the basic rate decreased to 25%.

Thus established this pattern was repeated by her successors. Under Major the basic rate was further reduced, to 23%, while NICs were increased, to 10%. New Labour, as in many ways, did not disturb the status quo. By the end of the Blair/Brown era the basic rate had been cut to 20%, while NICs had increased to 11%. NICs were again increased, to 12%, by the Coalition government.

Why was this? Numerous opinion polls and focus groups would tell politicians that National Insurance was seen by the voters as the most acceptable tax, despite being levied only on income from employment, and, besides a modest amount introduced by Gordon Brown, only on incomes below the upper earnings limit. The favourite tax of British voters is peculiarly regressive and targets the wealth-generating part of the economy, leaving the incomes received by asset-owners untouched.

This rather flies in the face of received wisdom, and other polling, that holds that the favourite tax is one paid by those somewhat richer than the voter who is asked the question. This apparent contradiction is simply explained by a piece of spin. National Insurance is paid as “contributions”, whereas Income Tax is, well, a “tax”. Although there is no real difference here, except a name, it would appear that a tax smells much less foul if it is called a contribution. The Great British Public mind a bit less about being asked to contribute to the common good of the country, then they do about being taxed.

This piece of public relations spin was taken to its paint-by-numbers limit by Rishi Sunak, as chancellor to the last Prime Minister of the Thatcherite consensus, Boris Johnson. In September 2021 they announced that they would introduce a new tax, called the fluffy bunnies and cute babies Health and Social Care Levy, at a rate of 1.25%. It was widely expected that at least some of the money raised by the new tax levy would be used to cut the basic rate of income tax by 2%, or even 4%, as a pre-election giveaway.

Liz Truss was Prime Minister for only 49 days. But she appears to have a lasting legacy as the Prime Minister who reversed the tide on National Insurance Contributions. The Health and Social Care Levy was abolished. Her successor, Sunak, has now overseen a cut to NICs rates to 10%, a rate not seen for more than 20 years. The Thatcherite consensus of funding cuts to income tax rates by increasing national insurance contributions is ended. Everyone, it would seem, is now in favour of cutting NICs.

We are all Trussites now.

Lost Password (Tim)

* I’m ignoring the rate of Employer National Insurance Contributions for the purposes of this article, but I think the hidden nature of that tax is a whole different issue.