Rachel Reeves and the tax and spend doom loop
Rachel Reeves isn’t going to introduce a Wealth Tax, but she is going to tax the wealthy.
She isn’t going to impose austerity, but she is going to get spending under control. Confused?
Speculation over the contents of next month’s Budget has reached fever pitch, and it’s only going to ramp up from here. This is not idle curiosity; with businesses still adapting to the confidence-sapping and job-smothering fallout from last year’s Budget, there is now a genuine fear that what remains of our economic resilience could be crushed by the government’s need to fill an almighty black hole in the public finances.
The situation is serious; the latest economic data out today confirms that the UK economy is just 0.1 per cent larger now than it was in March. This is a lamentable state of affairs that ought to be met with humility and urgency by the government. But that’s not where we are.
A new report out today by economists at Barclays and the Institute for Fiscal Studies points out that while Rachel Reeves is busy blaming Brexit, Liz Truss and “austerity” for today’s mess, the situation is in fact largely “of her own making.”
Yesterday, Reeves conceded for the first time that tax rises are on the cards (making her look like the last person to realise) telling Sky News “we’re looking at tax and spending” while a Downing Street spokesperson refused to rule out increasing income tax or VAT, hikes to either of which would breach Labour’s manifesto.
Wealth taxes ‘will be part of the story’
The Chancellor also confirmed that taxes on the wealthy “will be part of the story” – and she struck an alarmingly bullish tone on this, claiming that when she abolished non-doms and hiked tax on private equity and private school fees there was lots of “bleating” and “scaremongering” – but that actually, it’s turned out fine and she’s basically free to do it all again.
To me this sounded genuinely dangerous.
People are leaving this country. People have left, and not just the non-doms but, increasingly, high earners who just want to feel like their work pays off. Private equity hasn’t abandoned the UK, she’s right, but a lot of its highest earners have and by the way, the Chancellor introduced a pretty modest tax change on the sector specifically because she understood that going any harder would have damaged the industry. As for private school fees, the sector says 25,000 students have moved from the private to the state sector as a result – increasing the burden on state classrooms.
The Chancellor looks at all this and things, at best, I got away with it, and at worst: I can ramp it up a gear. She can say with some sincerity that she isn’t going to roll out a dedicated Wealth Tax, but in the same breath she can tell tax-hungry Labour MPs that there are plenty of taxes that – as they see it – fall on the wealthy and she can increase them. Capital gains tax. Dividend tax. Employment taxes on partnerships. Pension relief and property taxes.
UK taxes rising at fastest rate in G7
It is now accepted that the tax burden will simply increase over the course of this parliament. Yesterday the International Monetary Fund said that taxes in the UK will rise at the fastest pace of all G7 economies. Government revenues, largely from taxes, will account for 40.6 per cent of GDP by 2029, the IMF predicted, up from 38.3 per cent in 2024 when Labour came to power.
This focus on tax rises is understandable (and depressing) but the other side of the coin is spending cuts, and economists are increasingly of the view that Reeves will have to demonstrate some serious discipline at the Budget if she is to retain the confidence of the bond market.
Moyeen Islam, fixed income strategist at Barclays, is clear: “Without reductions in spending, to deliver the sums required solely via tax increases could require breaking manifesto promises.”
He added: “That need for credibility-enhancing policy choices is the price that the government must be seen to be paying in order to provide reassurance to a wary market that has been quick to move sharply on any perception of rolling back on fiscal policy choices.”
Jordan Rochester of Mizuho – formerly of Nomura – yesterday spelt out seven possible market reactions to the Budget based on the amount of fiscal headroom Reeves generates and, crucially, how she gets there. Two of these scenarios were broadly positive, one was neutral and four were negative. Two of them were very negative indeed. As flowcharts go, it was sobering.
The truth is, Labour risks presiding over a situation where meaningful spending cuts are deemed politically impossible and so in order to make the numbers add up, as the Chancellor puts it, tax rises are deemed the only necessary and appropriate response – not just at this Budget, but at future Budgets.
What’s needed is urgent pro-growth policies including an immediate easing of the tax burden on people and businesses, combined with credible reductions to public expenditure. Instead, we get higher state spending paid for by higher taxes.
It’s a road to ruin and we’re already a long way down it.