There is only a week to go before the almost inevitable transfer of power from the Conservatives to Labour, and yet it is difficult to know exactly what to expect from the new government.
However, one thing we can safely assume is that taxes will rise beyond what the Tories have already planned. Hardly anyone believes Sir Keir Starmer when he says he will not raise taxes beyond what is in the manifesto.
The proposed tax increases detailed are too small to make a significant difference, and certainly will not offset existing upward pressure on government spending – rising healthcare and defense spending and the growing welfare burden of an aging population – or the additional commitments that Labor has publicly announced.
Despite widespread disbelief over his tax promises, Sir Keir has qualified his position somewhat, so that the pledge not to raise taxes now only applies to ‘working people’, whatever that means.
He also refuses to rule out a number of tax-raising measures that could be implemented but fall outside the scope of his core commitment to keep key tax rates unchanged.
One he has ruled out is a 10% transfer tax on Premier League football clubs – one rule, it seems, for excessive money-making in sport and entertainment, but another even more punitive for the less glamorous world of ordinary life. trade. But otherwise his lips are sealed.
What has been called a “conspiracy of silence” surrounds increases in capital gains and inheritance taxes, and the political left’s much-cherished goal of a meaningful “wealth tax.”
The Tories are right to draw attention to these possibilities, even if there is seemingly almost nothing they can do to reverse their disastrous position in the polls.
People know they are going to pay more tax, but they are so fed up with the Tories that they are going to vote Labor anyway. Or they naively assume that it will be other people’s taxes that rise, and not their own. How stupid can you be?
One measure that has been a bit of a nuisance for Labor concerns pension tax relief. In his first budget, in March 2023, Chancellor Jeremy Hunt announced the abolition of the lifetime pension benefit. For anyone serious about saving for a pension, this was a very welcome reform.
It is one thing to limit the size of the tax relief on pension contributions, but it is quite another if the government also absorbs the investment profits from pension pots, as the lifetime limit often did. After more than a decade of steady reductions in the lifetime limit, Hunt’s reform was therefore welcome.
In opposing this concession, Labor has been everywhere.
Rachel Reeves, the shadow chancellor, was initially having none of it.
“Labour will reverse the changes to tax-free pension benefits,” she said. “It’s the wrong priority at the wrong time for the wrong people.” Returning to the previous position would save the exchequer around £800 million a year.
Faced with an outburst of middle-class anger that threatened to damage Labour’s lead in the polls, there has since been a screeching reversal.
We don’t have to do this to stay within our budget rules, Labor recently said, and according to some reports we won’t.
Targeting pensions
We’ll see, but there are in fact much larger sums of money to be gained by eating the pension pie – for example, by further limiting the tax-free lump sum that can be realized from a pension pot. be left without inheritance tax, or by limiting the exemption to the basic income tax rate.
By promising to introduce “stability” in the context of retirement savings, none of these things are excluded. From a penny to a pound, the new government will find a way to limit at least some of these tax breaks.
Do not get me wrong. There is certainly debate about whether tax relief for pensions is a fair way to encourage savings. Those who benefit most tend to be relatively high earners who are likely to save anyway regardless of whether they are incentivized to do so.
Nevertheless, Reeves would be making a serious mistake if she regarded the British piggy bank as a treasure trove that could be plundered. One of Britain’s biggest structural weaknesses is that it saves far too little; treating what we do save as just another source of taxation is the wrong approach for any government committed to decent and sustainable levels of growth, as Labor continues to say is the case.
In terms of what we save as a percentage of disposable income, we are at the very bottom of the OECD rankings, alongside economic powerhouses such as Greece, Portugal and Mexico.
Britain’s poor savings rate does not fully explain the equally abysmal rate of investment in its productive economy; the US has a similarly low savings rate and yet is widely regarded as a model economy when it comes to growth.
Nevertheless, it is a glaring shortcoming, which can at least to some extent explain Britain’s embarrassingly low productivity growth. It’s hard to make decent investments without decent savings levels.
Doubling of weakness
In Aesop’s fable of the ant and the grasshopper, the grasshopper spends the long summer months feasting and dancing, while the ant builds up supplies for the winter. When winter arrives, the grasshopper begs the ant for food, but the ant refuses and asks why the grasshopper should benefit from all his hard work. The locust goes hungry and does not survive the winter.
The British economy is that locust. It lives on its past and fails to make good provisions for the future. By threatening to further reduce incentives to save, Labor is doubling down on the persistent weakness at the heart of Britain’s productivity problem.
Politicians find it difficult to face the truth, especially at election time, when promising the Earth is far more likely to win votes than grimly warning of impending belt-tightening.
Rebalancing the economy away from current consumption and towards investment should be a key policy priority, but there is little evidence of such an ambition in the Labor proposal.
One thing is certain: you will not start by further discouraging what the economy needs most, which is much more savings.