Will Rachel Reeves raise taxes in the autumn Budget? Yes. While most of the spending review is covered, as she claims, by the tax rises she brought in last year, and some changes to the fiscal rules that make it easier for her to borrow to invest, her new headache is how to pay for Labour’s sudden new mission to eradicate child poverty.
Restoring most of the pensioners’ winter fuel payment hardly counts in the big scheme of things – £1bn either way is a rounding error. But added to the cost of free school meals, the probable ending of the two-child cap on child benefit, and other previously unaccounted measures would cost more – some £5bn to £10bn a year. That would consume most of Reeves’s fiscal headroom, which is far too thin in any case.
This next Budget needs to build in a much more substantial buffer, to cope with the unexpected, and, with luck, to fund some handy tax cuts nearer to the next election. The most obvious “known unknown” is how soon she’ll have to ramp up defence spending to deter a European war. It seems an obvious, even glaring omission in this spending review, and the Americans will surely force the pace on that.
Reeves will need to raise taxes and she will do so this autumn. She will raise certain duties with inflation, as is usual. From the spending review, we can also see that local authorities, as usual, will have the freedom to raise council tax by 5 per cent. Aside from the unavoidable pressures of their SEND and social care responsibilities, they’ll have to do so to bring about the funding increases that the police are expecting.
Grimly, income tax thresholds will be frozen for yet another year – a medium-term policy set out in last year’s Budget that dates back to 2021 when they were imposed by Rishi Sunak, then Boris Johnson’s chancellor, to pay for the Covid recovery schemes. They were supposed to last until 2025 but will drag modestly-paid people into ever-higher tax bands until 2028 at least. It’s the biggest tax rise of all, and quite contrary to the spirit of Labour’s promise that taxes on working people won’t go up, but it’s so stealthy and has been going on for so long that it is hardly talked about, which is why chancellors like it.
Reeves will also be at liberty to fiddle with the other tax breaks and anomalies that chancellors in a tight corner usually turn to. On the whole, these will hurt the middle classes and above through capital gains tax, tax relief on private pensions and stamp duty on big houses. These don’t raise much, and generate unwelcome, often exaggerated headlines, so Reeves might be inclined not to lean too heavily on these measures. Luckily for her, it doesn’t seem (yet) as though she’ll be forced to abandon the digital sales tax (£800m) as a condition of the informal US-UK “trade deal”, such as it is.
The best way she could raise some money is to take up the suggestion, pushed by Reform UK and others but resisted by the Bank of England, of reducing the interest paid by the Bank (underwritten by the taxpayer) on the reserves they are required to keep. Depending on how far she pushes this, it could raise a handy £10bn to £20bn without necessarily wrecking the Bank’s ability to operate its monetary policies. In essence, it’s another tax on “rich bankers”, except the rich bankers don’t pay it, their customers do and it reduces their ability to lend for investment, ironically enough. So it’s a tax, but a highly tempting one. Reeves, with her famous years of experience at the Bank, might find it a much more palatable option than attacking “working people”.
The most rational tax to raise is fuel duty on petrol and diesel, which has, rather incredibly, been frozen for no good reason since 2011. Reversing the 5p cut introduced by Sunak is already scheduled for next year. Reeves could easily pay for her child poverty programme by gradually increasing the levy further in the coming years, but this environmentally unsound tax break is defended by a Praetorian Guard comprising The Sun and the “white van man”. Tragically, she’ll have to keep the freeze and 5p reduction in place – the only tax cut she’ll be responsible for.
What Reeves partially did last year, and needs to finish off now, is making sure she has enough revenue coming in for the next few years to cover all eventualities from yielding to political pressures to change course to the inevitable shocks that can arise, domestically and externally. The good news for her is that she ought to have enough options to increase her fiscal headroom this autumn without a repeat of last year’s nasty surprises. She won’t, in other words, have to ramp up employers’ national insurance contributions again (and she’d be mad to do so) or push corporation tax up. She knows that business has suffered enough, and she went too far last time.
Above all, Reeves needs to make every Budget she delivers more boring than the last one, that is until she can start delivering some tax cuts. Last year she was an inexperienced minister, and slightly panicky with it, given too much autonomy by the prime minister, and made some electorally disastrous choices. It was a baptism of fire, which she was fortunate to survive with only one U-turn.
Like Britain, she’s now on a course to renewal. Like Britain, she’ll need some luck.
