Rachel Reeves’s difficult second budget on 26 November risks landing as badly as last year’s winter fuel cut, unless she can tell a compelling story about who should bear the cost of the “renewal” Labour has promised.
The chancellor’s conference speech last week, received with standing ovations by the party faithful, made a powerful case for investment against austerity, and for Labour – not Reform – as the real workers’ party.
“Conference, don’t ever let anyone tell you that there’s no difference between a Labour government and a Conservative government,” she intoned – a line that went down so well in the hall, aides said, she ad-libbed a couple of extra lines for good measure.
What was missing, however, was any sense of the principles by which Labour will decide which groups to hit with tax rises – or how it might rebalance the system to make it fairer.
At one level that is understandable: Labour has a fearsome communications challenge on its hands. The central reason for what may have to be upwards of £20bn of tax rises is the Office for Budget Responsibility’s backward-looking reassessment of the UK’s productivity potential.
Step one for Reeves was to plant this complex idea – that we are still catching up with the true scale of the economy’s weakness after 14 years of Conservative austerity.
But just as the winter fuel allowance decision was missing a rationale – aside from the “black hole” in the public finances – a tax-raising budget with no narrative aside from balancing the books risks being unpicked.
Back in the summer, some around the chancellor were hinting Labour had been nudged by its fiscal predicament into (belatedly) weighing radical tax reform.
But that would require a clear story about what is wrong with the current system, and who is getting off too lightly – which will take time to develop publicly.
The Institute for Fiscal Studies (IFS) director Helen Miller urged Reeves in a recent FT article to “stop thinking in terms of isolated tax increases and start with a vision”.
She pointed out that the tax system as it stands is riddled with unfairness and distortions, such as “people on similar incomes can face wildly different tax bills”.
If Reeves chose to move in this direction, there would be no shortage of ideas out there for tackling the gap between the tax rate faced by wage earners and the generally lower rates charged on income from wealth – what the Resolution Foundation calls the “tax bias against employees”.
Recent research by the thinktank Demos tried to test potential public support for a £20bn-plus slate of progressive tax changes recommended by the Centre for the Analysis of Taxation (CenTax), many of which were aimed at reducing that bias.
These included charging national insurance contributions (NICs) on rental income – worth a handy £3bn – and an £11bn upgrade of the capital gains system, to equalise the rate with income tax but at the same time sharpen incentives with an investment allowance.
Through polling and focus groups, Demos found the public were potentially receptive to these and other reforms – much more so than a manifesto-busting increase in income tax or NICs.
When they presented participants with a mocked-up BBC news story describing the chancellor as making “nine large tax rises” to “‘slash loopholes and rebalance the tax system”, those who felt positive about the idea outnumbered those who felt negative by 10 percentage points.
Most individual revenue-raising measures were viewed positively, too – including levying additional council tax on homes worth more than £2m and charging the equivalent of employer NICs on the pay of partners in law and accountancy firms.
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By contrast, presented with the notion of raising the basic rate of income tax, objectors outnumbered supporters by 35 percentage points.
There may have been a propitious political moment to breach the manifesto pledges – most convincingly when Reeves arrived in No 11 and professed herself appalled at the state of the nation’s books.
Fifteen months on, unpicking the decision to stick with the pledges would smack of desperation from an unpopular government: although there are some in Labour who would prefer it to a series of smaller tweaks.
Reeves is determined to stick with the pledges – but if she plans instead to implement a package of reforms, it must be more than just a shopping list of the revenue-raising measures least likely to rile the Daily Mail.
Treasury insiders suggest looking to last year’s budget as a guide. Reeves raised an additional £8bn from higher-income individuals, they point out – once measures such as higher capital gains tax, VAT on private school fees and inheritance tax on farms are totted up.
Those dots were never joined at the time, however – opening Reeves up to criticism from the left that her team finds especially irksome: that she has failed to tax the UK’s wealthiest more.
Many tax reform measures recommended by the IFS, CenTax and a battery of other thinktanks would have the benefit of being pro-growth as well as pro-fairness by reducing incentives for taxpayers to bend their economic behaviour to minimise their bills, for example, by setting up pointless one-person companies.
But it would be a courageous chancellor who presented £20bn to £30bn of additional taxes as though they were solely aimed at boosting Britain’s productivity.
Instead, Reeves should reach for the language of solidarity, social justice and fairness, that this particular Labour government tends to recoil from.
The chancellor stressed in her speech that she believes in “a Britain founded on contribution”. She has less than eight weeks to make the case that some of us should contribute a bit more.
