The Garrulous Jay – TEARS (Tax Expectations Are Rising Sharply)

Labour made possibly their biggest mistake last year before they were even elected. By falling for the Tory trap of committing not to raise taxes on ‘working people’, they boxed themselves into an acute fiscal corner.

It was therefore interesting to hear the PM recommitting to his Chancellor this week. To be fair he was left with little choice, but this has deprived him of the ‘Truss option’ of jettisoning Rachel Reeves to save his own skin, if things go from bad to worse.

This means that after a few weeks in which the government has turned the U-turn into something of an art form, albeit more Munch than Monet, they have very little wiggle room.

The changes to eligibility for the Winter Fuel allowance, combined with the impact of giving up on almost all of their proposed benefits cuts, leaves a £5-7 billion hole in the public finances, which ‘cannot’ be filled with increases to income tax, employee NICs or VAT.

At the last Budget this “pro-business” government hiked employer NICs and also hit business owners and farmers with changes to inheritance tax and business asset disposal relief, making it hard to go back to these wells for more fiscal water.

Perhaps the Chancellor takes this budgetary bind personally, hence the tears in the Chamber on Wednesday being attributed to a “personal matter”.

So what could be done? Here are some options that would potentially raise just an extra £5 billion…

Income Tax – Stretching credibility to near breaking-point, Reeves could argue that higher and additional rate taxpayers were not the folks she had in mind when they fell into the pre-election tax trap. Adding 2p to both tax rates would just about raise the £5 billion.

Capital Gains Tax – Increasing CGT by 5 percentage points across the board would raise £4-6 billion, whilst equalising CGT rates with income tax rates, as some have advocated, would yield and additional £15-17 billion. Theoretically attractive but vulnerable to the Laffer Curve effect, and politically challenging given much of the existing revenue is derived from business disposals.

Inheritance Tax – Tricky… Adding £5 billion to IHT receipts would represent a 66% increase, and that’s before the measures already introduced last year have taken effect. It might also hit middle England’s homeowners particularly hard.

Pensions Tax-free cash – There was plenty of kerfuffle about this before the last Budget, but then nothing. To get to the £5 billion target a number of studies estimate that tax-free cash would need to be completely abolished. That would be met with howls of protest so at best this therefore looks like a partial solution.

Wealth Tax – A new tax on the “very wealthy” looks good in theory…assuming they don’t all take the nearest Emergency Exit to foreign shores. One study estimates a tax of 0.25% on net wealth above £2 million per person would hit the £5 billion goal. But new taxes are costly to implement and the efficacy of wealth taxes in other countries has been mixed.

Barring a miraculous recovery in the UK & global economy between now and the autumn, it may not just be the Chancellor crying come October/November.

All sources derived from ChatGPT.