Britain’s beleaguered Labour Government has begun a desperate scramble to determine which of our taxes should be jacked up – and by how much – in the autumn Budget.
Even though we’re now in the midst of the summer ‘silly season’, when political news tends to take a back seat to more frothy activities, Prime Minister Keir Starmer and Chancellor Rachel Reeves are already in cahoots to soften up worried financial markets and hard-pressed voters for major tax rises.
Friendly newspapers and sympathetic columnists are being briefed on how a further steep rise in taxes, which are already at historic record levels, is unavoidable. Barely a week goes by without some Labour grandee floating their particular pet scheme to get us to pay more tax.
Failed former Labour leader Neil Kinnock has proposed a 2 per cent wealth tax on assets over £10million claiming, ludicrously, that it would raise more than £10billion (ludicrous because no wealth tax anywhere in the world has ever raised anything like that).
Former Labour PM (and Chancellor) Gordon Brown has gone public with his plan for swingeing increases on gambling levies, raising more than £3billion a year to pay for abolishing the two-child benefit cap. He also wants Reeves to fiddle with the fiscal rules (as befits a past master of such sleights of hand when he ran the Treasury) to give her headroom to spend more.
In May, Deputy Prime Minister Angela Rayner, whose grasp of tax matters isn’t even rudimentary, sent Reeves a ‘confidential’ memo (which of course was promptly leaked, to Rayner’s advantage with the Labour Left) proposing various tax-raising wheezes, from limiting pension tax relief to higher taxes on dividends to aligning capital gains tax more closely with the higher rates of income tax.
She was ahead of Brown in pushing for higher betting levies but didn’t go quite as far as Kinnock on a wealth tax, merely saying it should be ‘explored’ (though clearly she’s an enthusiast).
Associates of Starmer and Reeves have been busy floating tax rises of their own. In the past week journalists have been briefed on everything from cutting pension tax relief to slapping a new ‘windfall tax’ on bank profits (but not on energy companies, since Labour has already sucked the life out of North Sea oil and gas).
‘Reeves’ first Budget knocked the stuffing out of the economy. Hence the predicament in which we now find ourselves,’ writes Neil
Even in the summer doldrums two conclusions are inescapable: a slew of taxes rises are being earmarked for the next Budget; and the increases will be significant. Perhaps not quite as much as the £40billion Reeves piled on in her first Budget last October. But enough to raise many billions in extra revenues nevertheless.
Not all the tax hikes currently being mooted will see the light of day. But the gambling industry should brace itself for big tax rises (though Reeves might use the extra revenue to make up for shortfalls elsewhere rather than increase welfare spending on children, as Brown wants).
Current levels of pension tax relief are in jeopardy. Capital gains and dividend taxes will at least be nudged up. Above all, it is pretty certain that the freeze on income tax thresholds, introduced by the Tories, will be extended for another two years (to 2030).
By dragging people into higher income tax brackets it generates billions – and Reeves needs billions to stay within her fiscal rules.
A wealth tax, however, is a non-runner. It would take ages to set up and Reeves needs fresh cash now. As extensive foreign experience illustrates, it would also generate de minimis revenue. It could even cost the Exchequer by turning the current rush of rich taxpayers from our shores into a stampede.
Labour is forced into a potpourri of tax rises because in its 2024 manifesto it ruled out raising income tax, VAT and National Insurance contributions (NICs) – the three biggest generators of tax revenues.
The Treasury insists that pledge will be kept. Perhaps. But I wouldn’t hold your breath. Labour has already broken most of the other tax promises it made to win power.
Indeed, it’s really reneged on not increasing NICs too because, though last October’s rise affected employers’ contributions rather than those of ‘working people’, in the end it’s the workers who pay the price in the form of lower wage growth and fewer jobs, as many (especially in the hospitality sector) are already finding out.
According to Neil, Reeves ‘has presided over a stagnant economy and spent like a drunken sailor – a fatal combination when it comes to national finances’
Let’s not forget that Labour politicians insisted during last summer’s election campaign that they had no plans for a general increase in taxation. The tax rises they had in mind were small and limited to things Labour affects to hate – like private schools and non-doms – which would not affect the vast majority of voters.
That promise was smashed to smithereens months later in Reeves’ October Budget, which increased taxes by £40billion.
At the time, she was adamant this was a one-off rise forced on her by the so-called fiscal ‘black hole’ she had inherited from the Tories. Voters could be sure she would not be back to empty their pockets a second time.
But the new black hole she now needs to plug is all too real – and entirely of her own making.
The Left-leaning National Institute of Social and Economic Research said this week it could be as big as £50billion. That looks a bit toppy to me. But it’s likely bigger than the one she invented last summer.
Reeves has presided over a stagnant economy and spent like a drunken sailor – a fatal combination when it comes to national finances. There is now a yawning gap between her spending plans and the revenues taxes are generating.
Since the debt markets are no longer in a mood to indulge her profligacy, she can’t fill the gap with more borrowing. Hence the mad scramble for tax rises. Of course, there is another way. The bloated British state consumes more than £1trillion in public spending a year – and rising. It should not be beyond the wit of a prudent government to make significant savings, thereby avoiding the need for more borrowing or higher taxes.
But Starmer and Reeves are being held hostage by their own backbenchers: ever since they forced the Government to abandon even the most modest of welfare cuts, they’ve made it clear they will not countenance public spending cuts of any kind. So brace yourselves for tax rises.
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Last autumn’s hefty tax increases have already taken their toll on economic activity. The British economy is now stuck with next-to-no growth, rising unemployment and persistent inflation.
Somewhat absurdly, Reeves tried to take credit for the Bank of England’s cut in interest rates on Thursday (the Bank sets rates independent of government).
In reality, she has rekindled inflationary pressures, thereby impeding the Bank’s ability to cut rates in the future. She has presided over a sharp rise in the national minimum wage and a huge increase in NICs. Both have contributed to reigniting inflation. Food prices in particular are surging.
The Bank expects overall inflation to spike to 4 per cent by September – double the 2 per cent it is charged with delivering. It expects groceries to rise 5.5 per cent this year. The British Retail Consortium fears it will be 6 per cent. So much for Labour tackling the cost-of-living crisis.
Couched in its usual opaque, diplomatic language, the Bank says – in effect – that government policies are fuelling a worrying rise in inflation and have become a drag on growth. The minutes of its deliberations warn of growing ‘upside risks’ to inflation which is why it ‘remains focused on squeezing out any existing or emerging persistent inflationary pressures’.
In other words don’t expect any more interest rate cuts this year. The financial markets are pencilling in February 2026 as the earliest next cut, with maybe only one more to come after that. Bad news for an economy barely growing at all.
Yet worse could be coming. Reeves’ first Budget knocked the stuffing out of the economy. Hence the predicament in which we now find ourselves.
But the scale of tax rises she is now contemplating for her second Budget risks tilting the economy into a death spiral. Scary times, indeed.
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