Buckle up for more tax rises

Scrutiny of Keir Starmer and Rishi Sunak’s economic pledges intensified today after the IFS once again accused Labour and the Conservatives of engaging in a “conspiracy of silence” over the dire state of Britain’s public finances and ignoring “painful choices” ahead.

It will be a “considerable surprise” if taxes are not increased over the next five years, warned Paul Johnson, head of the Institute for Fiscal Studies, given the incredibly tight fiscal situation that an incoming government will inherit.

First, a quick recap of Britain’s challenging economic reality: over a decade of stagnation, paired with a pandemic and an energy crisis, has forced the government to spend, borrow and tax on a vast scale. Public sector debt stands at a 60-year high while taxes are at their highest level since 1949. Despite these high levels of taxation, debt and public spending, public services are under significant pressure, as illustrated by widespread council bankruptcies and record NHS waiting lists. 

And yet, “these raw facts are largely ignored by the two main parties in their manifestos,” according to the IFS. 

As for the Green Party – which has pledged vast borrowing to fund spending plans – or Reform – which proposes major welfare cuts – these smaller parties are not complicit in the so-called conspiracy of silence. Yet the IFS is equally damming of their respective fiscal pledges: “What they propose is wholly unattainable, helping to poison the entire political debate.”

Although both the Tories and Labour stand accused of dodging tricky fiscal questions, interest is inevitably focussed on Labour, given the near certainty that it will form Britain’s next government. 

According to Johnson, an incoming Labour government faces a “trilemma”. It will need to either raise taxes by more than stated in its manifesto, make big spending cuts or break fiscal rules by resorting to extra borrowing, adding further to the already mounting public sector debt. 

Labour’s existing money-raising measures include imposing VAT on private schools, increasing windfall taxes on oil and gas companies and cracking down on tax avoidance. Yet such measures will go nowhere near raising the level of money required to balance the books, warns the IFS.

Shadow Chancellor Rachel Reeves has given herself very little leeway by way of tax rises since she has committed to not increasing income tax, National Insurance, VAT or corporation tax in the next parliament.

That said, when it comes to capital gains tax, Reeves’ careful use of language is perhaps telling. Labour has “no plans” to raise it, Reeves has said, while repeatedly denying opportunities to rule this possibility out in more decisive terms. It’s worth remembering too that any incoming government preparing to hike up capital gains tax would be foolish to tell the public in advance and prompt a rush to sell assets. 

Why does Johnson appear fairly confident that taxes will rise in the next five years? Perhaps because Britain’s recent political history suggests post-election tax rises are almost to be expected. Over the past eight general elections, net tax rises have followed in all cases except for 2017, with an average increase of £21bn a year. 

As for the prospect of big spending cuts, Labour seems to be banking on the hope that kickstarting economic growth can prevent it from becoming the party of austerity. Though, as Ian Stewart wrote recently in Reaction, every government aspires towards faster growth but few achieve it.

Labour has also set itself a highly ambitious goal, of securing the highest sustained growth in the G7 group of major western economies. Which would mean returning growth to levels not seen since in Britain since before the 2008 financial crisis.

There is, of course, one more option. As Stewart also points out, when faced with bad news on growth, the tendency of governments has been to change the fiscal rules and borrow more, rather than double down on tax rises or spending cuts. Indeed, according to the Institute for Government, no developed world economy has changed these rules as frequently as Britain. 

So buckle up and brace yourselves for more rewriting of the fiscal rules, alongside higher taxes. 

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