Whether the Conservative Party or the Labour Party (on its own or in coalition) forms the next government, the state of the public finances means that the new administration will have to consider unpopular tax increases. The Institute for Fiscal Studies confirmed this in its review of the election manifestos for the two main parties.


Should Theresa May’s party be returned to government with an increased majority of MPs in the House of Commons, the prime minister will have to balance the books through a combination of tax rises and further austerity measures to control public spending.

If Jeremy Corbyn confounds the current opinion polls and leads the Labour Party in government or in a coalition with the SNP and the Liberal Democrats, he too will be forced to face the realities of the current state of the public purse.

Only one British government in recent times has presented the British public with a clear explanation of why they were increasing taxes for a specific purpose. In his second term of office, Tony Blair increased National Insurance contributions for all earners to fund investment in the National Health Service.

The big issue, at the time, that the British civil service was unable to address in clear policy terms, was the notion of hypothecation for the additional National Insurance revenue raised by the Blair government.

For clarity, hypothecation is civil service-speak for ensuring that money raised for a particular area of government spending is guaranteed to be spent on the purpose for which it was raised. The Chartered Institute of Taxation has a very good summary of how this works, in an article by Hamant Verma.

The key element of tax hypothecation that has not been fully developed as a policy idea in the United Kingdom is the element of targeted-fixed time tax-raising.

This can be defined as Temporary, Focused, Hypothecation of Tax or TFHT.

The Tax Policy Center of the Urban Institute and Brookings Institution has produced some interesting research on the use of temporary tax hypothecation for ‘corrective’ measures. This is part of the policy framework known as ‘nudge’ policies. Essentially, targeted tax increases are designed to nudge citizens in the direction that government policy would like them to travel. A ‘sugar tax’ is an example of a corrective temporary tax, with the proceeds targeted at health campaigns or services to counter the detrimental health issues associated with high-levels of sugar consumption.

Another example is government taxes on tobacco and alcohol in the form of duties paid by the consumers. However, there is no hypothecation element to this form of tax raising, at least not in the UK and the taxes applied tend to be permanent, although the rates can change from time to time.

TFHT can be differentiated from other forms of hypothecation and corrective taxes because it has to include all three elements: tax increased for a temporary period, for a focused purpose and hypothecation needs to cover where the money sits in a government’s overall tax revenue collected and be allocated solely for the purpose for which it was collected.

There are two bodies of research that provide a starting point for any government to develop the idea of TFHT. The first area of research is in attitudes of tax payers to the idea of temporary, focused taxation. There is some research in the area of hypothecated taxation but the focus has largely been public attitudes to policy using fiscal stimulus or fiscal penalties. The second area of research deals with public attitudes to charitable giving.

In the UK, as in other countries, charitable giving, particularly in response to immediate and temporary crises such as natural disasters, raises essential revenue that is focused on a particular cause.

Governments are unlikely to favour the use of referendums to secure popular acceptance for increasing taxation for a temporary, focused area of government spending. Moreover, there is much recent evidence on attitudes to tax and the differences in attitudes between countries.

In the UK, the prospect of permanent or semi-permanent increases in the level of taxation are politically caustic for all of the major political parties. This is at least the perception in terms of taxation and electoral success.

The idea of TFHT, is an area that could be explored by the new government, not least because the alternatives, are limited to the use of increasing income tax, national insurance or VAT. Such blunt instruments, as part of the new government’s fiscal policy, provide little scope of developing popular and successful areas of public policy and the delivery of public services.