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Labour's Tax Crackdown Could Be Dampened By "Bigger Public Finance Challenge", Economists Warn

Shadow chancellor Rachel Reeves has said Labour will clamp down on tax evasion to raise money for schools and the NHS. (Alamy)

3 min read

Economists have said Labour plans to clamp down on tax avoidance will do little to ease the tight fiscal picture on public spending the party is facing if it wins the general election later this year.

On Tuesday shadow chancellor Rachel Reeves said the Conservatives had "failed to tackle" the issue of tax avoidance, and that the gap between expected revenue from tax and actual revenue from tax "remains unacceptably high" – estimated at £36bn for 2021/2022. 

"We will take on the tax dodgers because if you make your home and do your business in Britain, then you should pay your taxes here too," Reeves said. 

Labour's plans, which will cost £555m and would enable HMRC to hire up to 5,000 more staff, will raise over £5bn which they will set aside to fund manifesto pledges on the NHS and school breakfast clubs. 

However, deputy director and head of tax at the Institute for Fiscal Studies (IFS), Helen Miller, told PoliticsHome that while it "makes sense" to invest money in HMRC to raise revenue from tax evasion, there was "big uncertainty about what the return on investment will be". 

"Nobody knows exactly the answer to that, because what you have to do is go and work out where this evasion is happening, how you can crack down on it," said Miller. 

"They're talking about training 5,000 new members of staff, who would need to be specialists in this kind of stuff. There probably is more revenue to be had, but I think there's a lot of uncertainty about whether for their £550m they would get £5bn.

"That doesn't mean you shouldn't do it, there's lots of things in life that are uncertain, but in terms of planning in the public finances, I think it's worth bearing in mind that they've got some uncertain sources of revenue that may underperform."

Miller also said while £5bn was "not a trivial" amount of money, and may have the ability to make a significant difference in terms of school breakfast clubs, when it comes to the overall fiscal picture for the UK "it's really quite small". 

"[the next government] will inherit a set of plans that have cuts to most departments, it's going to have to deliver those," said Miller. 

"Frankly, whether they raise £5bn, £3bn, or no billions, it won't have really any effect on that bigger public finance challenge."

Dominic Caddick, economist at progressive think tank the New Economics Foundation, told PoliticsHome while Labour's plans were "welcome and would claw back some of the £32bn 'tax gap'", they also said "revenues raised from tax-avoiders can be uncertain". 

"The data on what can be raised is usually not complete compared to tax changes where we already know who pays," Caddick explained. 

"£5bn will be a drop in the water compared to the lack of investment and poor quality public services Labour are likely to inherit at the next general election. "

Caddick believed Labour should look more broadly at "unfairness" in current taxation as a way of raising revenue, including tackling legal loopholes in inheritance and capital gains tax.

"Such proposals have more certain revenues attached to them, for example, closing loopholes for the wealthiest and for polluting firms could raise up to £7bn per year while equalising taxes on capital with that on Labour could raise an extra £9bn," he continued. 

"Labour should be much more ambitious when looking at tax options if it wants to provide the UK economy with the investment it desperately needs and reverse the trend in declining public service quality."

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