Reeves should be honest: income tax is going up
Income tax threshold freezes are a de facto tax rise but the revenue won’t be fully realised until the end of the parliament. She should adjust rates now while there’s still time to improve public services before the next election? And fix distortive cliff edges while she’s at it, says Will Cooling
Rachel Reeves has lost all control over the nation’s finances.
For all her talk of tough decisions, she has repeatedly taken the easy way out and as a result has had to return to the well for public spending and welfare cuts. For all her promises to be fiscally responsible, she has given herself no leeway. Above all, Reeves is trying to dig her way out of a hole she dug herself back with her first budget. Scrambling to find a tax she could increase without breaking the letter of her party’s manifesto commitments, she settled on increasing employer rather than employee National Insurance Contributions. This was always a cynical dodge, given that ultimately employers would pass the cost onto their employees through lower wage increases.
Alas, the sheer size of the increase is causing real pain for businesses in the short-term, forcing them to either sack people, jack up prices, or both. To add insult to injury, the public sector as the nation’s largest employer has been particularly badly hit by this tax increase, meaning that much of the extra spending Reeves proudly announced last year is being used to pay for the tax rises that funded it! A problem compounded by another above-inflation increase in the national minimum wage and the impending cost of implementing Angela Rayner’s package of new worker’s rights.
What makes her passivity all the more remarkable is that slowly but surely she is increasing income taxes, having signed-up to continue Jeremy Hunt’s plan to freeze the personal allowance until March 2028. By the time of the next election, that will be adding over £30bn to the government’s annual bottom line. But of course that benefit will be back loaded, because she’s waiting for inflation to slowly inflate away the personal allowance.
Reeves should seize the moment
Why not seize the moment and bring that additional income forward? Lowering thresholds now would bring in revenue while there’s actually time to make meaningful improvements to public services before the election. She could also fix the bizarre bottlenecks that have arisen where some higher rate taxpayers are faced with excessive marginal rates when their personal allowance or child benefit is aggressively withdrawn. Surely it would be better to just start the additional rate at a lower level than engage in convoluted kludges that are arbitrarily forcing people to stop working.
Nobody could argue that Labour didn’t secure a mandate to manipulate income tax thresholds; they explicitly left themselves the freedom to continue Hunt’s freeze. They could even sweeten the pill by promising to resume the inflationary increases, from a new, much lower baseline.
The reality is that we can only go back to having the type of public services we had in the 2000s if we rebuild the tax base that once funded them. A big part of that is undoing the ramping up of the personal allowance that actually began back when Gordon Brown screwed up the abolition of the 10p income tax band. Before Alistair Darling’s emergency repair job, the personal allowance represented about a quarter of average earnings, something that today would be around £9,000. Bringing the personal allowance down to this level would represent no more than a £60 monthly tax increase for the low paid, something that Labour should be more than able to compensate for by improving public services.
Rachel Reeves could not have looked less in control than she did last week. Nobody buys that she has given herself sufficient headroom to avoid further spending cuts, and few believe that such spending cuts are politically or practically possible. She needs to find tax increases from somewhere. Absent any fresh ideas, she should bring forward one of the tax rises she already has planned.
Will Cooling writes about politics and pop culture at It Could be Said Substack