Week in Business: Is Rachel Reeves About to Drop a Tax Bombshell on the UK Economy?
It’s almost enough to make you feel sorry for the Chancellor; just days after u-turning on welfare cuts because “the economy has turned a corner” and just hours after promising a period of “national renewal” official data reveals the UK economy shrank in April – and shrank a lot. So, where does this leave us?
If you didn’t watch the Chancellor deliver her Spending Review, you didn’t miss much.
It had all the pomp of a Budget statement, with none of the substance. It was a string of local press releases about Southport’s pier and Kirkcaldy’s high street with some robotic rhetoric thrown in.
Reeves said “In place of chaos, I choose stability. In place of decline, I choose investment. In place of pessimism, I choose renewal.” As The Spectator’s Madeline Grant put it, she sounded like Francis of Assisi on LinkedIn.
She trumpeted her decision to pump £190 billion more into public services and an extra £113 billion into public investment – though in her speech she said nothing about the spending cuts across government departments that will be needed to help pay for all this.
Clipping Whitehall’s wings?
Don’t get me wrong, I’m in favour of clipping Whitehall’s wings, but this wasn’t a reforming mission – this was rearranging the recipients of a trillion pounds of public money to deliver on Labour’s agenda. There were winners, and there were losers.
There were also some heroic claims about the amount government could save through that old favourite of politicians; efficiency savings.
Apparently £14bn a year can be clawed back by being smarter and more agile – good luck with that. And even if any of these savings materialise will Reeves use them to ease the tax burden? No. She’s relying on them to make her existing spending plans add up.
That’s just one of the many reasons why almost everyone now expects a fresh round of tax hikes in October’s Budget.
KPMG’s chief UK economist, Yael Selfin, said the current growth forecast of just 1.2 per cent would lead to public sector revenues falling below Reeves’ expectations – and that’s if we even hit 1.2 per cent.
She said that:
“By cementing in substantial increases in departmental spending, Reeves has made further tax rises look increasingly inevitable,” adding “The recent U-turns on welfare and higher borrowing costs mean that the chancellor may need to find an additional £20bn in taxes later this year.”
Ruth Gregory from Capital Economics predicted that Reeves may have to raise as much as £23bn this year “if she wishes to avoid an adverse reaction in the markets,” adding that “whatever happens, it’s clear even harder decisions for Reeves lie further down the line.”
Meanwhile experts at Oxford Economics said that “to make the fiscal position look healthier, the government might decide it has some scope to pencil in additional current spending restraint in 2029-2030” but warned that such a move “would risk undermining the government’s fiscal credibility, so we still expect the government will need to implement relatively large tax rises in the autumn Budget.”
You get the picture.
So, where might the government target for these tax rises?
Reeves has ruled out touching income tax or VAT and in fact she’s said she’ll “never repeat” a Budget like last October’s – where businesses were slapped with tens of billions in additional taxes.
So she either breaks her pledges, and moves on income tax or VAT, or she has to get sneaky – and target pensions, for example.
AJ Bell’s Laith Khalaf said tax relief on pensions could be for the chop, with the re-introduction of the pensions lifetime allowance, abolished by former Chancellor Jeremy Hunt, potentially on the cards.
Tomm Adam, a partner at financial advisory firm Blick Rothenberg, said pensions tax relief currently in place makes it a “perfect target” for tax hikes to be introduced with an “annual allowance reduction, lifetime allowance reinstatement, and salary sacrifice abolition all likely in the Treasury’s crosshairs.”
Then there’s our old friend – fiscal drag. The Chancellor vowed to unfreeze the tax thresholds by the end of this parliament, liberating taxpayers from the nightmare of being dragged into higher tax bands by virtue of inflation.
She could change her mind on this – it wouldn’t bring in any ready money but would be factored in for the years ahead.
Taxes on dividends, banks and inheritance?
Finally she might look to the helpful advice of deputy Prime Minister Angela Rayner, whose recent memo outlined half a dozen taxes she thinks could be hiked including on dividends, banks and inheritance.
Of course, it’s possible that none of this will be necessary, the economy could rally over the summer, forecasts could pick up, the Chancellor may just squeak through. But is that likely?
This week we got confirmation that the UK’s unemployment rate has ticked up – again – and we now know that there are a quarter of a million fewer payrolled employees than there were this time last year.
Tax increases on jobs combined with global economic headwinds have had an effect – and the worrying 0.3 per cent decline in GDP in April seems to confirm that the relatively good growth we saw at the start of this year was a one-off.
And now, history is about to repeat itself.
Last July the Chancellor and Prime Minister spent months warning the country that the October Budget would be ugly – and they allowed weeks and weeks of damaging speculation about tax rises to cripple business and investor confidence.
That period of uncertainty is now acknowledged as having had a real negative impact on the economy and now, unless the Chancellor can offer a cast iron promise not to increase the tax burden, we’re going to endure exactly the same kind of damaging uncertainty again – right the way through from now to the October Budget.
It seems one year into office and no lessons have been learnt.
And by the way, today is Tax Freedom Day – until today, every penny the average person earned went to the Treasury. Only from today will Brits finally start working for themselves. The way things are looking, next year’s Tax Freedom Day could come much later in the year.