We are a month away from the Chancellor delivering her horror Budget – and judging by the numerous kites being flown by Treasury officials, it seems Rachel Reeves has little idea as to how to tackle the whopping black hole in the nation’s finances.
She is desperately scrambling around for ideas like a contestant in a treasure hunt.
Although the size of the country’s financial wound varies according to which expert you speak to, it’s certainly north of £40 billion. I can also guarantee it isn’t going to be nibbled away by spending cuts. They are anathema to Labour: chalk and cheese.
This Government is spending our money like confetti as evidenced by its waving through last year of generous pay awards to public sector workers – and its refusal to seriously tackle a £300billion annual benefits bill ballooning at a rate of knots.
Indeed, I wouldn’t be surprised if Ms Reeves sanctions more profligacy on November 26 (Budget Day) by lifting the two–child benefit cap. Such a move would be raucously received by Labour MPs, most of whom seem oblivious to the fact that the country’s finances are in an almighty pickle – £11.5billion deeper in the red than at the start of the year and with overall debt currently standing at a staggering £2.9trillion.
So, with a pruning of public spending a Labour non–starter, the only route now open to the beleaguered Chancellor is to tax us until our proverbial pips squeak.
Yet she hasn’t made life easy for herself by the commitment she and Sir Keir Starmer made pre– election not to raise income tax, National Insurance (NI) and VAT.
If any one of these taxes were to be lifted, it would cause widespread outrage. According to a poll by research company YouGov, just 22 per cent of Britons support a Budget increase in either NI or the basic rate of income tax, while only 14 per cent back a hike in VAT.
Chancellor Rachel Reeves is desperately scrambling around for ideas to fill the UK’s financial black hole like a contestant in a treasure hunt, writes JEFF PRESTRIDGE
But, simultaneously, a breaking of Labour’s manifesto would go a long way to addressing the yawning hole in the Government’s finances.
For example, official figures indicate that a 1 per cent increase in income tax would raise a chunky £8.6 billion in the new tax year (starting April 6) while a 1 per cent increase in the standard rate of VAT would yield £8.8 billion. Similar hefty tax raising levers are no longer available elsewhere, especially within the business community, which is still reeling from Ms Reeves’ destructive £25 billion NI raid.
Any further taxes on businesses would send unemployment skyward and the economy into freefall. Hello economic armageddon, goodbye Ms Reeves.
For the moment, it appears that Ms Reeves has no desire to go down the manifesto–breaking route, but she might be forced to by the time she stands up in the House to deliver her Budget.
Some Labour officials are already saying as much, telling the Financial Times a few days ago that an increase in income tax represents the easiest way for the Chancellor to raise desperately needed revenue in one fell swoop. They added: ‘It’s like a single punch to the face rather than a thousand cuts over a long period.’
That bombshell could well come our way in a month’s time, especially if Government borrowing remains unchecked. But in the meantime, we will have to endure Treasury officials briefing selected members of the Press about an array of possible new tax raids coming our way. None of them will deliver the bags of revenue Ms Reeves desperately needs, though they could do great damage – and cause widespread disruption – to our household finances and wealth if they form part of the Budget.
‘She’s scratching around for ideas,’ one tax expert told me last week. ‘In the process, she’s alarming nearly everyone. Not just the super wealthy, but also those whose only crime has been to do the right thing throughout their working lives – and buy a home and put aside a modest amount of money for their retirement.’
In terms of the wealthy, ideas given an airing in recent days have included a tax charge on limited liability partnerships, a business structure used widely by GPs, lawyers and accountants.
Currently, these partners (190,000 of them) are classified as self–employed, so do not pay employers’ National Insurance (NI). Last month, the Centre for the Analysis of Taxation described this NI exemption as an ‘accident of history’ and called for the introduction of ‘partnership national insurance contributions’. The move could raise up to £2 billion of extra tax revenue.
Treasury bigwigs are next month planning to restrict the tax–free cash that can be taken from people’s pensions
A tax on the sale of high–end properties is also widely expected, as are new council tax bands, paving the way for those living in expensive homes to be clobbered with a massive increase in bills.
Although the extra revenue would go to cash–strapped councils, it would negate the need for the Treasury to keep bailing them out.
While Ms Reeves could argue with a degree of justification that some of these taxes would be aimed at those with the ‘broadest shoulders’ (GPs, lawyers and accountants all earn seriously good money), they are not going to be enough to fix the Government’s abject finances.
That is why other tax–raising measures, impacting on millions of households with more modest wealth and earnings, continue to do the rounds. None have been ruled out by Treasury officials.
They include restricting the tax–free cash that can be taken from pensions, a clampdown on gifting money to reduce a future inheritance tax bill, and a big hike in capital gains tax rates so they are aligned with tax on income.
We also mustn’t forget the widely reported cut in the annual cash Isa allowance, which will force many diehard savers to have more of their cash in taxable rather than tax–free accounts. As Shadow Chancellor Sir Mel Stride said, the expected cut in the cash Isa allowance – from £20,000 to £10,000 – is a ‘tax raid, pure and simple’.
How much all these moves would produce in extra tax revenue is debatable – as is how quickly the tax would come into the Treasury’s coffers. In my mind, ‘too little’ and ‘not fast enough’ to meet Ms Reeves’ pressing needs.
Indeed, I am sure that any significant cut in tax–free pension cash could well be met with a wave of legal challenges.
I fear that on November 26 the Chancellor will go ahead with some of these tax hikes. But I suspect she is playing a game of smoke and mirrors with us all – and that a big nasty tax bombshell awaits us akin to that sprung last year on UK business plc.
Maybe it will be one that involves breaking Labour’s manifesto, such as a hike in income tax. Or maybe one that is so left field that no tax expert or economic think–tank has yet thought about it.
Yes, we can tinker with our finances in the run–up to the Budget – fill our boots with cash Isas, make gifts to loved ones and use our £3,000 capital gains tax allowance to take some share profits – but we cannot defend ourselves against the unexpected.
So, please try to sleep well between now and November 26 – before the real financial nightmares begin. Personally, I recommend Nytol. So far, it’s protected me from Budget horrors.
