George Bull

Written by: George Bull

George Bull

Senior Tax Partner

Climate change emergency and tax on a war footing

It has been widely suggested that, in tackling a global climate emergency, nations should effectively be on a war footing. With the concept of a climate emergency gaining more and more acceptance, we thought it would be interesting to look back to the UK War Budget introduced by Chancellor of the Exchequer Sir John Simon on 27 September 1939.

When the Chancellor of the Exchequer stood up to present his war budget, people knew it would be painful. And so it was. The rate of income tax was increased by 10 per cent to the shocking and unprecedented level of 37.5 per cent. At the same time, surtax – a graduated tax on higher incomes – was increased to a top rate of 47.5 per cent on incomes over £30,000.

The experience of the First World War had demonstrated that profiteering could be a real problem. The Chancellor therefore imposed an excess profits tax of 60 per cent on any excess of profits over those of a pre-war standard period.

Estate duty, alcohol, tobacco and sugar (yes, sugar) duties were all increased with immediate effect.

While there was to be some relief from the income tax increase for people whose income dropped as a result of war, many allowances were simultaneously reduced.

To put all this in context, pre-war tax revenues were running at around £142m per year. The Chancellor estimated that the effects of the war would reduce tax revenues by some £54m to £88m. The new taxes amounted to £107m – almost twice as much as the £54m lost – and were intended not only to replace lost revenues but also to help fund the additional costs of war. Further funds were to be raised through National Defence Loans and there was to be a renewed emphasis on making sure that people paid their taxes promptly.

As the Chancellor said, ‘The payment of taxes, even heavily increased taxes, would not exhaust the duty of the private citizen. It would also be his duty to contribute to the greatest extent possible to these loans when they were announced’.

That wasn’t the end of it. Further tax increases followed during the war, so that by 1945 tax accounted for around 38 per cent of GDP. For comparison, the latest OECD figures show that in 2017 UK tax amounted to 33.3 per cent of GDP.

Don’t get me wrong – I’m not for one minute suggesting that the first Budget under a new Prime Minister should look anything like the September 1939 budget. But I am concerned that three aspects of the current UK tax system are inconsistent with the gravity of the climate change emergency.

First, prime ministerial candidates are using the promise of tax reductions to enhance their electoral prospects. While tax incentives and interest rate cuts may be necessary to stimulate the UK economy after Brexit, responding to climate change will require more government stimulus. The fiscal capacity to support this should not be frittered away, especially at a time when the UK tax base is contracting.

Second, the UK Treasury seems lamentably slow in developing and consulting on a route map from a currency-based tax system to one in which carbon-based taxes have a much greater role to play. This failure is building up pressures in the tax system which may impair any future Chancellor’s ability to respond to fiscal needs as the UK moves towards a net zero carbon emissions future.

Third, the debate about subsidies for new technologies, the period for which subsidies should be available and the framework within which subsidies should be phased out seems to be driven by immediate worries about unpopularity rather than the longer-term needs of the country.

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