Rachel Reeves walks UK tax tightrope

Rachel Reeves’ assertion on Tuesday that she saw no need for any “additional tax rises” might have sounded like a blanket pledge of zero UK tax increases under a Labour government.

Yet, as is often the case during a general election campaign, the shadow chancellor’s words were not quite as concrete as they sounded.

Various leading economists and think-tanks have said that whoever wins power on July 4 will face a vicious spending squeeze and have to slash public spending, put up taxes or borrow more.

Labour’s official line is that it has already ruled out increases to some of the biggest taxes: income tax, national insurance, capital gains tax, corporation tax and wealth taxes.

On whether other taxes may rise, the main opposition party has developed a more nuanced pledge road-tested by leader Sir Keir Starmer on Monday. “We have gone through all of our plans, and none of them require us to raise taxes,” he told the BBC.

By contrast, asked on Tuesday whether the next government would need to put up taxes to deal with Britain’s creaking public services, Reeves said: “There are no additional tax rises needed beyond the ones that I’ve said.” 

She told reporters at a Rolls-Royce plant that Labour’s only increases in tax would be the ones the party had already set out. These include extending the windfall tax on energy companies’ profits until 2029, imposing VAT on private school fees and ensuring private equity bonuses are “taxed appropriately”.

Reeves on Tuesday appeared to have gone much further than Starmer and ruled out any tax rises whatsoever. But Labour officials later insisted her words were a reference to the party’s manifesto — in line with Starmer’s Monday comment — rather than what may lie beyond July 4.

“We have no plans for additional taxes beyond those we have set out,” said one. “There are no additional tax rises within the manifesto, we have no plans for any.”

Such wording may still allow a Starmer administration to conclude that some taxes need to rise. But with many people struggling with the cost of living, that could prove unpopular.

Politicians on both sides of the Atlantic have long been haunted by then- US presidential candidate George H W Bush’s injunction to voters to “read my lips: no new taxes” in 1988. He broke the pledge a few years later. 

Despite half a dozen of the biggest UK taxes ringfenced from increases, an incoming chancellor would still have an array of different options to boost the coffers. VAT, which raises 15 per cent of government income, is by far the largest tax that Labour has not ruled out lifting.

A Labour government could alternatively raid various property taxes, such as stamp duty. Other options would be to increase the levies around pensions, although that could prompt a backlash from older voters, who are more likely to cast a ballot than younger people.

Beyond lie an array of potential taxes ranging from betting and gaming duties to environmental levies, fuel duty and tobacco and alcohol duties.

Reeves said in her 2021 party conference speech that she would review “every single tax break” in Britain, but has barely mentioned it since.

For now it is understandable few politicians want to speak aloud about any idea of taxes rising: Britain’s tax burden is on course to reach 37.1 per cent of GDP by 2028-29, 4 percentage points higher than before the coronavirus pandemic. 

But Carl Emmerson, deputy director of the Institute for Fiscal Studies, said new administrations, whether Labour or Tory, had a record of ushering in higher taxes after taking or retaking office.

“History suggests we should not be surprised if we hear about big tax rises the year after the election,” he said, pointing to announcements following the 1992, 1997 and 2010 elections, among others.

The current Conservative government has pencilled in years of fiscal restraint after the election. These imply annual real-terms cuts of between 1.9 per cent and 3.5 per cent to the budgets of non-protected Whitehall departments, including transport, local government and justice, according to the IFS.  

Because of that harsh fiscal backdrop, many economists believe Labour could end up raising taxes to avoid brutal spending cuts.

The IMF and other forecasters say the next UK government faces a repair job worth tens of billions of pounds to the public finances, with no real scope to achieve it via big new cuts to public spending. 

In its latest Article IV report card on the UK, the IMF concluded that the Conservatives’ 4p cuts to national insurance — unopposed by Labour — had been unwise, and warned that the UK needed to take some “tough choices” to tackle a £30bn hole in the public finances. 

Jens Larsen, an economist at consultancy Eurasia Group, also voiced doubt about Labour avoiding tax rises and said political tactics might argue for moving sooner rather than later.

“If they want to lay the blame for tough decisions at the door of their predecessors, they need to do it early,” he said.