Rachel Reeves has sharply curtailed Labour’s potential revenue-raising options by ruling out a lengthy list of tax reforms, drastically limiting the party’s fiscal room for manoeuvre if it wins power, analysts have warned.
The shadow chancellor has pledged not to lift capital gains tax, income tax and national insurance, nor introduce a mansion tax. Instead Reeves has repeatedly argued for tax cuts to put more money in the pockets of working people.
Earlier this month she added corporation tax to the list too, ruling out raising the levy from its current rate of 25 per cent.
But experts said the shadow chancellor would, if Labour won the general election, have to raise some taxes, boost borrowing, or else embrace the current trajectory of brutal spending cuts pencilled in by Conservative chancellor Jeremy Hunt.
“It’s hard to see how they square the circle on the public finances given the number of tax increases Labour have ruled out,” said Arun Advani, an associate professor at Warwick university.
“The answer is they may need to either break one of their pledges on taxes, or take a serious axe to reliefs. But you have to add up quite a lot of reliefs to get anywhere useful,” he added.
Reeves and leader Sir Keir Starmer are determined to show voters that Labour has embraced fiscal discipline, an effort on display this week when Starmer dismantled his £28bn-a-year green spending plan.
New Labour under Sir Tony Blair had a similar approach in the run-up to the 1997 election, as the party broadly accepted Tory chancellor Kenneth Clarke’s tight spending plans after winning that general election.
Now UK public finances are in a far more fragile state. Total public sector net debt, expressed as a percentage of GDP, will be 98 per cent this fiscal year, according to the Office for Budget Responsibility. By contrast, it stood at just over 36 per cent in the 1996-97 fiscal year.
By the end of the 1990s the UK was also running a budget surplus, compared with estimated public sector net borrowing of 4.5 per cent of GDP in the current fiscal year.
Hunt has pencilled in a punishing public spending regime after the election, allowing for a real-terms increase in departmental spending of 1 per cent per year.
Given government priorities including prioritising NHS spending, Hunt’s plans imply steep real-terms cuts for unprotected departments such as justice and home affairs.
Reeves and Starmer may have to decide between two politically unpalatable choices: slashing funding to departments that are already crying out for money — for example justice, transport and local government — or finding new sources of revenue for the exchequer.
Labour has said it will drive economic growth and thus more tax revenue. But economists and other experts are sceptical about the idea that this would pay off in the first few years of a new government.
“They are hemmed in,” said Neville Hill, co-head of consultancy Hybrid Economics. “It is very difficult for them . . . all they have left is the ability to stimulate growth, and that is very hard.”
At present Labour has detailed three tax rises that would raise a combined £5.6bn: a raid on the earnings of private equity bosses; taxes on private school education; and ending non-dom status, where people can live in the UK but be domiciled elsewhere for tax purposes.
Reeves’s spokesman said Labour had “no plans for further tax rises beyond those we have announced to fund our public services, including our schools and hospitals”.
“The priority for the next Labour government will be growing the economy,” they added.
Helen Miller, a tax expert at the Institute for Fiscal Studies, said: “They have ruled out some easy options for raising revenue — after all income tax and NICs are the biggest two taxes, and if you want to raise large sums you can easily do so by making a small change to one of the rates.”
That still leaves a lot of other ways of getting money out of the system that would not require a new government to put up those rates, she added.
The next government could raise “serious money” through reforms that address the differences in the ways various forms of income are taxed, combined with allowances to avoid discouraging investment, Miller said
Advani said the next government could also expand the base on which national insurance contributions are levied, for example by targeting investment income.
Labour could look at closing tax loopholes. Reeves said in her party conference speech in 2021 that she would review “every single tax break” in Britain.
But asked by the Financial Times about the review earlier this month, Reeves pointed only to Labour’s promises on private schools, private equity and non-doms.
The area of tax reliefs that give carve-outs to specific sectors or activities is also treacherous ground. The biggest, in the areas of pensions, home sales and VAT, run the risk of major political backlashes. Even small ones are protected by vocal constituencies who will protest any attempt to reduce their generosity.
The risks of even minor incursions into those reliefs were highlighted when George Osborne was chancellor from 2010 to 2016.
He provoked outrage after attempting to charge VAT on food such as pasties that are sold at “above ambient temperature”. Osborne ultimately retreated.
