Sir Keir Starmer and Labour’s high command on Friday signed off the party’s general election manifesto, including a commitment not to raise four key taxes: income tax, national insurance, VAT and corporation tax.
The UK’s main opposition party has pledged to impose VAT on private school fees, close a tax loophole used by private equity chiefs and levy more tax on “non-doms” and energy companies.
Beyond those measures designed to pay for manifesto pledges, Labour’s official line is that has “no plans” to raise any other taxes.
Shadow chancellor Rachel Reeves has said her plans to restore economic growth will lift revenues and fund Labour’s ambitions. But in the short term, forecasts for the fiscal outlook could change abruptly — in either direction.
Could Labour raise other taxes?
Reeves has repeatedly said Labour has “no plans for a wealth tax” and that the new spending commitments it has made do not require any tax increases beyond the measures already outlined.
But Starmer’s carefully worded promise to voters is that there will be “no tax increases for working people” — and he has not included capital gains tax or a mansion tax in the list of areas where changes are ruled out.
In practice, Reeves is likely to face intense pressure from inside Labour to increase taxes on wealth, in particular by raising the rates charged on capital gains from sales of second homes or equity investments. They are much lower at present than the rates levied on higher earnings.
Carl Emmerson, deputy director of the Institute for Fiscal Studies think-tank, said a Labour government would be able to justify a surprise increase to CGT because pre-announcing it would allow investors to sell assets before they became liable for higher rates.
The most radical option would be to lift the rates on capital gains, which range from 10-28 per cent, closer to the rate of income tax. Equalising the two would raise close to £16.7bn a year, according to calculations from Arun Advani, associate professor at the University of Warwick.
Other reforms could generate smaller amounts: reforming inheritance tax rules that allow business wealth to be passed on tax-free could, for example, raise about £1.5bn, said Advani.
The IFS argued on Thursday that there was a strong case for implementing reforms to raise more money from council tax, updating the 1991 property valuations underpinning the current system.
At present, stamp duty is set to bring in more revenue with a planned drop in the minimum property prices at which homebuyers start paying the tax.
Is there scope to tweak the fiscal rules?
Reeves has said she will stick with the current fiscal mandate stipulating that “debt must be falling as a share of the economy by the fifth year” of the forecast from the Office for Budget Responsibility, the fiscal watchdog.
This has in recent years proved more of a constraint than the “supplementary” rule capping the deficit at 3 per cent of GDP — which Reeves wants to change to a rule of bringing day-to-day spending in line with revenues, while allowing borrowing for investment.
One change that could make it easier to meet the rule as framed at present would be for the government to target total public sector net debt, rather than the measure it now uses — which excludes the Bank of England.
The Conservatives have ruled out this option but Labour has made no specific commitment.
James Smith, research director at the Resolution Foundation think-tank, said the change would add about £16bn to the government’s headroom in 2028-29 and 2029-30, by altering the way Treasury transfers to the BoE to cover the costs of its quantitative easing programme were captured.
It would essentially be an accounting tweak, however, and the gains would not be as great in later years, as the BoE approached the end of quantitative tightening.
Many experts have said it would be better to reframe the debt rule, arguing that fixing a point in time at which debt must fall — between the fourth and fifth year of the forecast — is “arbitrary”.
Although it would require a change of tack from Reeves, bringing debt down over the next decade could make more sense, Emmerson suggested — even if it would not solve underlying pressures on the public finances.
Can ‘tax rises’ be redefined?
When Labour publishes its manifesto next Thursday the precise wording of its pledges on taxes will be crucial.
Keeping the main tax rates unchanged might not preclude measures to broaden the tax base. After all, revenues from personal taxes are already set to increase by £11bn a year under Conservative plans to freeze tax thresholds — a policy that Labour has not said it will scrap.
Other ways for Labour to broaden the tax base could include changing the treatment of pensions savings, or including investment income as well as earnings in the scope of national insurance, noted Ashley Webb, economist at consultancy Capital Economics.
“There is all sorts of wriggle room. Even the definition of what a tax change looks like is questionable,” Smith noted.
One further step could be to change the way the BoE pays interest on the £770bn of reserves it holds on behalf of commercial banks.
Interest on these reserves, deposited at the central bank as a result of the BoE’s quantitative easing programme, is now paid at the central bank’s benchmark rate of 5.25 per cent.
Webb said the potential savings, if the BoE stopped paying any interest, could reach £40bn a year, though they could fall to £17bn a year as the BoE wound down its QE programme.
In practice, any reform would probably still leave the BoE paying interest on part of the reserves but could be “a chunky source of revenue”, Webb said.
In accounting terms, this would lower government spending, by reducing debt service. But it would in effect amount to a tax on banks, creating a risk of higher costs for consumers.
