Week in Business: The tragedy of Labour’s tax addiction
Aged former Labour leader Neil Kinnock may have just enjoyed the most influential week of his political career – last Sunday, he set the hares running with talk of new taxes on the wealthy.
Days later, his son, now a government minister because that’s how they do it in the Labour party – echoed his father’s call for a wealth tax, and now it’s taken on a life of its own. But it won’t just be the rich that Labour looks to squeeze with higher taxes.
I’m afraid things are about to get very painful indeed.
Take it as a given that taxes are going up come the October Budget. The government has admitted as much – recognising the “financial consequences” of their decision to abandon welfare reform.
Then, of course, there are the financial consequences to their wider policy agenda – unemployment climbing, growth barely registering.
Economists now talk about a range between £15bn and £40bn as the amount the government will need to find in new taxes in order to balance the books.
There are other options, of course – borrowing would be one, but the bond market won’t let us do that – for good reasons, and then there’s spending cuts, but Labour MPs won’t let the government do that.
So, tax hikes it is.
Despite last year’s tax-heavy Budget being described by the Chancellor as a “one off” – a painful but necessary move to restore public finances and “build the foundations for growth” – we will in fact find ourselves back at square one come October this year.
Starmer: leader or coward?
This government is addicted to tax. It’s in their instincts, they can’t help themselves. True, one or two Labour MPs might have recognised the importance of reducing spending – Rachel Reeves among them – but the one that matters, the one that decides whether or not to have this fight – Keir Starmer – is basically a coward.
When Labour MPs held him to ransom with the threat of a humiliating defeat on welfare reform – a package which would have shaved just £5bn off a £100bn bill – he faced a choice.
He could have stood on the steps of Downing St and appealed to the country – set out his case – explained why these savings were necessary and, while he was at it, he could have asked the public to consider whether it’s acceptable that 3,000 a day are signed on to Personal Independence Payments.
He could have called on other parties to support his mission and challenged his own MPs to do the right thing. The result would likely have been explosive but it would have constituted an act of leadership.
Instead, Starmer did what Starmer does. He crumbled. He tries to make a virtue of this, calling it pragmatism, but it’s just weakness.
And one consequence of that weakness is that taxes will have to go up beyond their current record high level.
Starmer was asked this week whether he could rule out raising income tax, VAT or employee national insurance. He simply replied: “yes.”
So far, so good.
The stealth tax of fiscal drag
He was then asked to make the same guarantee that he wouldn’t implement a wealth tax. This time, his answer was rambling, but nowhere in it did he say he ruled it out.
Most alarmingly of all, he was asked if he will honour the Chancellor’s previous pledge to unfreeze income tax thresholds by 2028 – thus liberating people from the impact of being dragged into higher rates of tax simply because of inflation – and here, you guessed it, he refused to do so.
So we pretty much know that the government will maintain the freeze on income tax thresholds – the stealth tax beloved by all governments – and a form of wealth tax will emerge, too.
One Labour source was quoted yesterday as saying that the government wants to find ways of taxing the wealthy, and they want to be able to tell Labour MPs that it is a wealth tax but they don’t want to call it a wealth tax in public.
Good luck with that.
If I were a betting man, I’d expect the government to also look at equalising capital gains tax with income tax, increase the bank levy – the additional slice of corporation tax paid by banks, fiddle with dividend tax and remove tax benefits and incentives around pensions.
A tax tragedy
But here’s the central tragedy of this mess:
Leaving aside the wider issue of the overall tax burden and the fantasy economics that drive our public finances, there are some taxes that really do need to come down.
Our housing market is glued up because of stamp duty.
We want older people to downsize? Fine, but moving from a £2.5m property to a £1.5m property will come with a stamp duty tax bill of £90,000 – and very few people have that sitting around.
A £1.2m home in London – sounds like a lot, is a lot – brings a tax bill of more than £60,000.
And it’s all relative; a five figure tax bill for buying a £400,000 house is still enough to put people off.
When this tax was slashed during Covid, the property market fizzed with transactions and economic activity. Reducing it now, or reforming it, or even temporarily suspending it would cost money, of course, but it would also spark some much needed economic dynamism.
The same applies with the tax on share trading – getting rid of it would technically cost the Treasury a few billion but would have profound benefits and upsides elsewhere in the economy.
Unfortunately, given the state of the economy and the instincts of this government, smart tax reform is just not on the cards.
All they’re left with is the urge to tax more, to fill a hole they created.
This is going to be painful, and it is going to cost us.