As covered by Chamber UK, on Tuesday the Prime Minister gave a “reality check”. What taxes will the Government raise to deal with this massive shortfall?
Comparisons to Tony Blair were hard earlier this week as the Prime Minister warned of a “painful” budget. “But I have to be honest with you”, Starmer went on to say, “things are worse than we ever imagined.”
Since late July, Labour have claimed that government finances were even worse than was made clear to the public.
The Office for Budget Responsibility (OBR) is currently investigating this claim, with it stating that it will have a report produced before the budget’s announcement in October. IFS director Paul Johnson stated that the damage to the nation’s finances “does genuinely appear to be greater than could be discerned from the outside”.
The Conservatives have a different perspective.
Opposition Leader Rishi Sunak tweeted yesterday that it had “been planning all along” to raise taxes. Conservative politicians have generally rejected the government’s characterisation of public finances.
No one, however, questions that the UK is in a bad fiscal situation.
What Taxes will Labour not Raise?
Labour’s “iron-clad commitment” to “not raise taxes on working people” was reiterated by the prime minister yesterday when he pledged not to raise income tax, national insurance or VAT.
Labour have previously ruled out raising corporation tax from the 25% level in their manifesto, however, they have reiterated this commitment in recent days.
What Options Does Labour Have?
So far, the Government have not stated which new taxes they will introduce to deal with the fiscal shortfall. Details will be revealed over the next two months in anticipation of the budget.
So far, a number of policies to increase tax receipts have been proposed by the government.
- VAT on private schools
Labour have pledged to apply the 20% VAT rate to private school fees, something that has been exempt since 1973. The IFS estimate this will raise £1.3-1.5 billion.
- Abolishing the non-dom status.
According to research in 2022 by Warrick University and the LSE, this would also incentivise wealthy taxpayers to keep their money in the UK. This will simultaneously increase tax receipts whilst increasing Labour’s “number one priority” of growth.
- Closing tax loopholes
The government have pledged to increase investment in the HMRC by £855 million and close loopholes in the tax system. It claims this will increase tax revenue by £5 billion over the course of five years.
- Stamp duty increase
Labour have pledged to increase stamp duty by 1% for non-uk citizens. It is argued that this will give residents more competitiveness in the housing market. More controversially, it will enable the stamp duty cut for first time buyers introduced by the conservatives expire.
Even collectively, these policies do not come close to addressing the £22 billion fiscal ‘black hole’ identified by the government.
Rachel Reeves has pledged an “ironclad discipline” on finances, backing this up by empowering the OBR. As such, massive borrowing will be politically difficult
It will also be economically difficult.
Although lower than the height of the Truss premiership, gilt yields (the amount paid to those the government borrows from) have remained at historic highs. Borrowing will be particularly expensive. Additionally by issuing more gilts, yields will increase further, increasing future borrowing costs and making such a structural deficit increasingly unsustainable.
What Taxes Might Labour Increase?
The chancellor has previously rejected a ‘wealth tax’, a tax on assets but has made no firm commitment. The government have expressed openness to more traditional ways of taxing wealth; inheritance taxes and capital gains tax
When asked whether she would rule out increasing these two taxes specifically, the chancellor refused to answer the question three times.
Given the commitments made by the government, few other avenues seem open.
No Alternative?
There is of course one alternative to increased taxes and increased borrowing. Spending cuts.
It is generally assumed that Labour will cut some spending, although the chancellor has pledged that tax increases, over spending cuts would be the main way of addressing the fiscal deficit.
It is unclear exactly where cuts would come from. Councils, most notably Birmingham City Council, are in a state of profound fiscal crisis. Healthcare and education face similar problems of underfunding.
One proposal claims to be able to reduce government spending without damaging services.
Former Prime Minister Tony Blair, an individual with significant soft influence on the Government’s ideology, has suggested the deployment of artificial intelligence in the public sector. According to the Tony Blair Institute, this would average 10 billion in annual savings by the end of the parliament, and £34 billion in the next. It would also make 1.15 million jobs disappear.
Despite this, government ministers, including the chancellor, have expressed openness to the use of AI in the aftermath of fiscal decline.
These kinds of savings, however, would be in the long term. In the short term, a combination of spending cuts and taxes are likely.
Final Thought
The Government’s rhetoric is focused ‘honesty’. Not overpromising is likely a good strategy in such a bad fiscal situation. In contrast to alleged underreporting by the previous government, this may soften the blow of renewed austerity.