It’s time for Chancellor to come clean on tax, says HAMISH MCRAE

Next month, a lot of us are going to be poorer. Why? Because tax allowances have not been increased alongside inflation, with the result that many working people – and pensioners – are sucked into higher tax bands, which have not been increased in line with prices.

If inflation is anywhere near the target rate, that might seem all right – though over a generation even creeping inflation destroys wealth. 

A pound today will buy only about half as much as it would when Tony Blair became Prime Minister in 1997 – and that is on the official figures.

But when inflation sizzles into double digits, the impact on the amount of tax people have to pay is vicious. 

Take inheritance tax. The nil-rate band of £325,000 has not been increased since 2009-10. Allow for inflation and it should be £500,000 now.

If governments decide to squeeze up the tax burden, that is their right. But it should be done honestly, rather than by stealth.

Back in 1977, when inflation had gone into double digits, two MPs, Labour’s Jeff Rooker, and Tory Audrey Wise, proposed an amendment to the Budget, whereby the Government had a statutory obligation to raise personal allowances and tax bands by at least as much as the Retail Price Index (RPI).

RPI that year was more than 17 per cent – even higher than the 14.2 per cent peak in October 2022. 

Then, as now, the tax burden was shooting up, but at least governments had to be explicit about the extent to which inflation was boosting their revenues.

It was one of those rare occasions when two backbenchers from opposite sides of the House actually changed the law.

And now? Well, the Rooker-Wise Amendment is still legally in place, but it has become so customary for governments to over-ride it that it has lost its bite.

It’s true that public pressure has forced governments to establish and maintain protection against inflation for state pensions with the so-called triple lock, increasing them by whichever is highest of consumer price rises, average earnings or 2.5 per cent. 

But the additional cost of that is far less than the additional revenues that come in as a result of not increasing tax bands in line with inflation.

Governments like spending money, so it is in their self-interest to allow a bit more inflation, provided it isn’t enough to make people notice. 

The so-called money illusion – people feeling better off if they have more of it, even if that doesn’t buy anything extra – works in their favour. But now we do notice. 

What’s to be done? Somehow, we have to make sure that the default position is that all taxes should be indexed and any deviation from that principle should be explicitly announced and agreed.

That’s what Paul Johnson, director of the independent Institute for Fiscal Studies, wrote in 2019, and I agree with him. Given what has happened to inflation since then, the point is even more valid.

How to impose this discipline will be tough. 

The media can help, as indeed this newspaper is doing, by showing how fiscal drag cuts into people’s incomes and wealth. 

It’s a task for backbenchers too, and it should be cross-party, for governments of both major parties have been just as guilty. 

I’m not sure an updated Rooker-Wise amendment would work, but forcing government to be honest about taxation is surely in MPs’ long-term self-interest.

It’s also a job for the rest of us. Taxation has to be by consent. 

Obviously we can’t change tax rates, but we can be disciplined about our financial affairs. 

There are many ways in which we can cut our tax bills, from putting as much as possible into pensions to taking up Isa allowances and trying to spend money on things that are not taxed, such as most food.

And maybe we should just try to spend less. That seems to have been happening since Rachel Reeves’ disastrous Budget in October. 

She put up taxation, so people cut back. Growth has stalled. Revenues are coming in below forecast. 

The message seems to be getting through that the Government, like the rest of us, has to watch what it does with the money – and not before time.