Prepare for anything up to £30bn of tax rises. That’s going to be the unmistakable message from the “spending audit” the Chancellor, Rachel Reeves, is set to unveil on Monday.
The dire state of the public finances cannot have come as any great surprise to her; like an open book, it’s been there for all to see for a long time now.
And yet she has been shocked, shocked I tell you, by what’s been discovered in the three and a bit weeks since entering office.
It’s much, much worse than she thought.
If that’s really true, then she must have been asleep for the past several years.
Government spending rocketed to nearly 50pc of GDP during the first year of Covid and it’s only been slowly abating since then.
This year it will still be more than 44pc of national income, and not much less even in five years time, according to analysis in the International Monetary Fund’s last “Fiscal Monitor”.
Most of us might reasonably think that quite enough, but no, what Labour’s sleuths have uncovered is a ghastly legacy of “underfunding” across the public services. To deal with this shortfall, they must spend even more.
By “underfunding”, does Labour mean simply the last government’s somewhat feeble attempt to inject a degree of discipline into public spending after the let-rip of the pandemic? Why yes, it does.
There is apparently a giant “black hole” at the centre of the public finances which had previously gone unnoticed. It is the new Chancellor’s unenviable duty to fix it.
You cannot blame Reeves for trying it on, I suppose, but there was never any such conspiracy of silence over the nation’s true state of affairs; the Office for Budget Responsibility, the Institute for Fiscal Studies, Uncle Tom Cobley and all have been banging on about the pressures in public spending for years.
Somewhat ineffectually, it might be said, the last government was at least trying to keep the lid on them. Like the little Dutch boy with his finger stuck in the dyke, it stood bravely against the deluge, and suffered accordingly at the ballot box.
The challenge surely is not about opening the floodgates and finding the tax revenues to match, but root and branch public sector and welfare reform to bring them under control before they bankrupt the country.
It suited Reeves while in opposition to pretend she could govern without the need for significant tax rises. But now the veil has slipped, and she excuses herself by blaming it all on a cover up by the last government.
All new governments, whatever their colour, deserve a period of grace and even a degree of leeway in making difficult choices which are not necessarily what was said on the tin when standing for election.
Like a new chief executive parachuted into a corporate basket case, it is customary to “kitchen sink” the accounts – that is to exaggerate the extent of the mess left by the previous incumbents by making provision for all manner of nasties, real or imagined.
That’s what Reeves is about to do in preparing the ground for a raft of tax rises.
On the stump, she repeatedly gave the impression that Labour would not be raising taxes beyond a limited number of specified measures, such as the ideologically motivated imposition of VAT on private school fees.
Income tax, VAT, national insurance and corporation tax rates would be left untouched, Labour promised.
When challenged on other options for tax rises, Reeves would always insist that they were not needed or were not in her plans.
Hardly anyone believed her, but a promise is a promise. To nobody’s surprise, the plans changed the moment she entered Downing Street.
Armed with the discovery of a gaping “black hole” in the public finances, she’s all of a sudden a convert to the need for a still heavier tax burden.
She’s even being urged by some to break her core tax pledges, by for instance reversing the 4pc cut in employee National Insurance made by her predecessor Jeremy Hunt.
Bitter experience has taught the public to expect political promises to be broken, but if one of your goals is to restore public trust in politics, as the Prime Minister Sir Keir Starmer keeps saying, then this would be a pretty odd place to start.
It would be taking political cynicism to another level entirely, even allowing for the fact that if you are going to breach the manifesto, it’s best to do it early in the hope that voters will forget.
An unforeseen economic crisis might possibly justify such action, but there is no such emergency on the horizon. Ignoring evident failings in the public sector, the economy seems in fact to be functioning remarkably well.
What’s more, the last government under Rishi Sunak can hardly be blamed for the coming surge in public sector pay. The Tories spent the best part of the last two years resisting public sector pay demands, expending considerable political capital in the process.
If the floodgates are about to be opened, that’s entirely down to Labour and its union backers. It cannot be blamed on an inherited “black hole”.
In any event, having denied itself access to the major sources of taxation, Labour finds itself scratching around in the foothills for revenue that might fill the gap.
Some of these foothills, it should be said, are potentially quite revenue rich. Equalising capital gains with income tax rates and stripping away higher rate tax relief on pension contributions – two such measures which Treasury officials have long urged on ministers – would raise significant quantities of money.
But they would also run counter to the government objective of higher growth and investment. Again, if your goal is to improve on Britain’s lamentably low levels of business investment, you don’t start by further disincentivising savings.
Further attacking pension reliefs is particularly pernicious. For decades now, pensions have been treated as little more than a milch cow there for the milking rather than a great national asset, with deeply damaging consequences for the wider economy.
By abolishing the pensions tax credit on dividends so as to fund his social programmes, the last Labour Chancellor of significance, Gordon Brown, single-handedly dealt a death blow to Britain’s final salary pensions industry and in the process also severely harmed investment in the UK economy.
Corporate profits that might otherwise have fuelled business investment were instead diverted into plugging ballooning pension fund deficits.
By singling out pension tax reliefs as a ready source of revenue to pay for above inflation public sector pay awards, Reeves would similarly divert money earmarked for investment into current government consumption.
For how long can ministers keep blaming their predecessors for the challenges of day to day government? For now Labour enjoys a degree of goodwill. But voters’ patience will soon be wearing thin.
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