Tax rises are coming – and Labour will suffer the consequences
4 min read
It is one week until the Budget and, despite Rachel Reeves’ best attempts in her pre-budget televised address, no one is certain of what is heading our way other than tax rises in some form or other.
Many kites have been flown over the options facing the Chancellor. All we do know for sure is that – in the face of the OBR’s likely productivity downgrade, higher than expected average borrowing costs, low prevailing headroom and reduced growth – there will be a void that the Chancellor will have to fill.
If her oft-repeated determination to stick to her ‘iron-clad’ fiscal rules remains unshaken, she quite simply must raise taxes or cut spending. All chancellors have faced that same cold, unyielding arithmetical reality.
For the opposition, the preferred way of alleviating further tax rises is to cut spending, £47bn being set out by Kemi Badenoch in her conference speech last month. Such bold actions – a £23bn cut to welfare – look to be unattainable for a Labour Chancellor who lacks the support of significant tranches of her own backbenchers; who resisted even modest changes on Personal Independence Payments entitlement. The ‘Timms review’ won’t report until autumn 2026, leaving the Department for Work and Pensions budget inoculated against dial-moving savings.
The post-dated commitment to raise defence spending to 2.5 per cent by 2027 means short-term gaps are already being experienced. Add to that the perpetual pressures on NHS budgets and ongoing pay disputes means resisting further calls on the contingency reserve will be difficult before the Chancellor even contemplates savings.
When we examine tax-raising options, the key dilemma has been whether the Chancellor will choose to break the manifesto pledge on the ‘holy trinity’ (VAT, National Insurance or income tax).
The Chancellor’s downbeat press conference two weeks ago left businesses and consumers in full expectation of an increase to income tax, perhaps as part of a ‘swap’ with National Insurance.
However, having spooked people up and down the country, since this article went to print, more has been leaked, and we now have it ‘confirmed’ that there will be no increase to income tax after all.
The Chancellor’s options are now slimmer, and she must hope that by referencing tariffs, (disputed) black holes, Brexit and global uncertainties she earns some understanding amongst the flexibly defined ‘working people’. But most backbenchers and political journalists will focus on the cold reality of the impact on household finances across all income brackets.
Will she choose to increase her headroom above the historically low £10bn she maintained in her first budget? With ongoing speculation about future tax rises, it would seem wise, when the performance of the economy is far from certain.
A new ‘mansion tax’ or higher bands being applied to council tax have also been held up as realistic options, alongside changes to the treatment of pensioners’ wealth and allowing greater exposure to higher rates of income tax – all of which have previously been discussed favourably by Treasury minister Torsten Bell.
The National Insurance hike has had a negative impact on recruitment
Whatever emerges from that famous red box in two weeks’ time, it is certain that it will not have been an easy set of decisions. And the Chancellor’s confident assertion that she would “not be coming back for more” as she had made her big choices and reset the foundations will inevitably prove to have been mistaken.
The National Insurance hike has had a negative impact on recruitment of the lowest-paid and adversely impacted many sectors, particularly on our high streets where hospitality enterprises dominate – businesses have assuredly not been able to just absorb it as the Chancellor may have hoped.
I hope this time her new junior ministers, including another Resolution Foundation alumnus – Dan Tomlinson, the Exchequer secretary – will resist the recurring items put on the list of likely money-spinners by HMT officials.
The family farm tax in particular sticks in the mind from her first outing and a lot of people will be looking for some amelioration when she steps up to the despatch box.
John Glen is Conservative MP for Salisbury and Parliamentary Private Secretary to the Leader of the Opposition
