It never rains but it pours for Rachel Reeves – today’s rise in inflation to 3.6 per cent was higher than expected, and there was a ghost at the feast as the chancellor delivered her Mansion House speech last night – her Budget in the autumn.
The audience at her City of London dinner broadly welcomed her relaxation of financial services regulations, but wondered whether her next act in this arena will be hostile: there is speculation the Budget will include a levy on the banks’ profits and a wider wealth tax.
Remarkably, for a second year running, the government has sparked a summer of speculation about which taxes will rise in the autumn. Cue four months of damaging headlines. This is a government that doesn’t learn from its mistakes.
True, lots of the media speculation will prove wide of the mark. But some mud sticks, and a Labour Party struggling in the opinion polls can’t afford to have much more chucked at it.
Ministers don’t help themselves, firstly struggling to define the “working people” they will protect from tax rises, and secondly failing to rule out a wealth tax. I suspect the chancellor will not announce a new one – but that her Budget will target the wealthy, and that her allies will quietly tell Labour MPs she is achieving the aim of a wealth tax by other means.
Reeves offered a clue in the Commons in May: when Labour’s Brian Leishman called for an annual wealth tax on multimillionaires to raise £24bn a year, the chancellor replied: “At the Budget last year, we increased the rate of tax on non-doms, we increased capital gains tax, we increased the carried interest on bonuses and we introduced VAT on private schools. This government is ensuring that the wealthiest pay their fair share, because that is a basic Labour principle.”
After the humiliating climbdown on welfare, Reeves knows she has to keep the parliamentary Labour Party onside. The financial markets made clear they want her to remain chancellor after her teary Commons appearance, but some Labour MPs do not.
Reeves urged people to take more risks by investing more savings in the stock market and promised she would be “bold in regulating for growth”. Yet she should be bolder in addressing the long-term risks to the public finances – by ending the freeze and emergency 5 per cent cut in fuel duty; scrapping the triple lock; filling the looming £40bn gap from motoring taxes as drivers switch to electric vehicles and trying again to control the ballooning welfare budget with more carrots and fewer sticks.
A genuinely bold approach would mean levelling with the public about the trade-offs needed to balance the nation’s books instead of repeatedly scrambling together tax rises and spending cuts to stick to Reeves’s fiscal rules in every Budget. This hand-to-mouth approach makes the Starmer government look like it lacks a grand economic strategy and is picking on groups like pensioners or the disabled.
Reeves said in her speech that the world is changing, and I’m told that some government figures favour a “defence precept” – an earmarked tax rise to fund the 5 per cent rise in the defence budget by 2035 to meet the UK’s Nato obligations (as I proposed recently).
The problem: it would breach Labour’s manifesto pledge not to raise income tax, national insurance or VAT. But there could be a way of not breaking its letter: raising the 45 per cent rate on taxable incomes of £125,140 to 50 per cent. Labour could claim it would not hit ordinary “working people”. This “bold” approach would raise taxes for defence to leave more money for other public services.
Reeves should reform council tax, which becomes more unfair every year. The charge for a home worth £2m in England is the same for one worth £320,000 in the same local authority, and it’s based on 1991 property values. This is bonkers. More than half of homes are effectively in the wrong band. New higher bands would cut bills in the North and Midlands and raise them in the South. True, it would be dubbed a “mansion tax” by the media, but something has got to give, and Labour could win an argument on “fair tax” on property.
Reeves should live up to her own words last night – take more risks and be bold. I don’t mean risking economic stability, but taking political risks – with some short-term tax rises coupled with long-term reforms to break out of the doom loop of ever-rising taxes which hamper growth. As Helen Miller, the new director of the Institute for Fiscal Studies, put it: “The government cannot afford not to be bold.”
