Paroxysms of glee among Labour’s many enemies greeted last week’s forecast of a £41.2bn black hole awaiting Rachel Reeves’s autumn budget, from influential thinktank the National Institute of Economic and Social Research (NIESR). Expect another three months of bone-rattling warnings about imminent tax raids crushing every family. She is in a doom loop; no way out; ha, ha, ha!
Voices in the Treasury sound sanguine, pointing out that NIESR has a record of eccentric forecasts. Before the spring statement, it predicted that Reeves needed £57bn just to keep her fiscal rules: actually, it was £4.1bn. For Jeremy Hunt as chancellor in 2023, it generously forecast he had £97.5bn to spend: on the day, that shrunk to £6.5bn.
But the truth universally acknowledged (if not publicly by the government) is that taxes must rise. Debt interest costs £100bn a year, growth is nowhere near enough for rising NHS, pensions and welfare costs. Even the right talks of a “brutally honest conversation with the public”: that’s from Robert Colvile, the director of the Centre for Policy Studies, daring to come up with solutions that would sink his party at an election: “No more triple lock. Raising the state pension age … Asking people to pay for their social care out of their housing wealth.” (Quite right, but toxic in Torydom.)
Even more surprising, the director of the rightwing Institute of Economic Affairs (IEA), Tom Clougherty, advocates a tax rise: ending VAT exemptions to almost double the intake. The Institute for Fiscal Studies (IFS) agrees, and has suggested using the billions raised to generously compensate all lower-income households for their extra shopping costs. The IEA would compensate the losers, but spend the rest on cutting income tax. Counterintuitively, the great bulk of these untargeted VAT exemptions reward highest spenders – Waitrose not Iceland shoppers.
There is a new honesty about tax and spend among the serious. Hunting for easy money is becoming a national game. The rising clamour for wealth taxes springs from what everyone knows: the rich have gained monstrously from an economy that propels the upward redistribution of wealth. The 50 wealthiest UK families own more than the poorest half of the population, says a report from the Equality Trust. Much billionaire wealth comes from the ownership of property and financial assets, not “entrepreneurial spirit”, inflated deliberately by a decade of quantitative easing. The inheritocracy dominates.
Time to reach in and take some back. The Tax Justice Network wants a 2% levy on wealth over £10m, raising £24bn a year, strongly backed by Oxfam, Dale Vince and the Patriotic Millionaires UK campaign. The public agrees, by 75% to 13% against. Naturally, the great wealth-protection machine is in overdrive. The consultancy Henley & Partners claims that 16,500 UK millionaires are fleeing, quoted everywhere as gospel truth, but has been comprehensively questioned in a thorough report by Dan Neidle of Tax Policy Associates. Henley is a company that facilitates citizenship and residency for a wealthy clientele. But the narrative is out there: Labour has caused a tax flight.
However, Neidle, no rightwinger, issues warnings about wealth taxes. Wealth is now grotesquely agglomerated among very, very few, so 80% of wealth tax revenue would come from just 5,000 people and 15% from just 10 people. That makes the tax “uniquely vulnerable” to a handful who are gaming valuations or quitting Britain. Unless every country did it, he warns a regular levy would deter inward investors. The IFS is equally sceptical. The business secretary, Jonathan Reynolds, rudely dismisses the whole idea as “daft”.
Does that mean it’s dead? Not necessarily, as other Labour figures, talking to the Treasury team, put forward ideas privately that have wind in their sails. An instant retrospective wealth-tax raid to raise money urgently for that 5% GDP pledged for national defence has backing, I hear from those talking to the Treasury. Demanding a one-off whack for the defence of the realm could be popular and practicable. What’s more, howls of protest from the wealthy would help rebrand Labour usefully as both socially just and patriotic.
There are many ways to skin fat cats, using existing taxes. Here is the list from the Centre for the Analysis of Taxation: the big tax-raisers are £16.7bn from equalising capital gains and income tax rates, treating all income the same. But look how craftily the rich defend themselves: private equity lobbying just won a very quiet reprieve to keep disguising earned income as low-taxed capital gain. Running rings around the taxman, some escape inheritance tax on precious art works by promising to make them accessible to the public and then failing; some have even been sold. At least Labour is hiring 5,000 HMRC staff, cut by the Tories despite collecting many multiples of their salaries.
Everyone needs the services that national insurance symbolises: it should be paid on all incomes, for landlords, shareholders and investments. Nor will taxing the rich be enough: income tax can’t be taboo, never raised since Denis Healey in 1975, as “drastic times call for drastic action”, writes Paul Johnson, the recently departed IFS director. Property is grossly undertaxed: be brave and reform council tax into a fairer land-value tax.
What is certain is that promises will be broken, taxes raised and the faux row will be equally ear-splitting whether Reeves takes a lot or a little. So go for radicalism; the country needs it – for defence, health, old age, decayed infrastructure and green power. Roll the pitch now, prepare the way, and change the moral climate on the tax deniers and avoiders.