Growth in the black market could be Reeves’ legacy

There you have it. The truth is out. The mask has slipped. As many of us warned,  and every economist worth his or her salt predicted ahead of the election, taxes are on the way up. 

 Rachel Reeves has finally admitted that she is being forced to raise taxes when she presents her budget on 30 October. At least, though, her raison d’être is a surprise, if not spurious: it’s because of what she claims is a whopping black hole of £22 billion in the public finances which the last government hid and lied about.  

It’s really not worth going into the technical ins and outs of whether the last government did lie or not – although technically it didn’t. Reeves had access to all the consequential numbers – the spending plans and everything else – for months before the election. Even if the last government was, let’s say, economical with some of its figures, this great big black hole represents just 2 per cent of the total spending. 

Yet of course the black hole – made larger because of Reeves’ promise of a 5.5 per cent public sector pay rise – gives the new Chancellor the opportunity she has been itching for which is to put up taxes and scrap other spending promises made by the previous regime. 

Yet Reeves will have a serious problem when presenting these tax rises to voters with a straight face as now we know she is the one who has been dishonest. Now she’ll need her best poker face  if she is to convince voters that higher taxes are the only way out of the mess she has inherited after having repeated her mantras for months on end that there would be no tax rises for “working people”.  

That begs another question. What does “working people” mean, anyway ? Most people work – in some capacity or other. At best it’s a disingenuous phrase, at worst, patronising and reminds me of George Osborne’s constant use of “hard-working families” when justifying his hare-shirt.

Even the wealthy – billionaires such as Jim Ratcliffe of Ineos or the James Dyson’s of this world – go to work. Are they included in “working people?” I’m not sure they do in Reeves’ world.  

Or more pertinently, what about our dynamic entrepreneurs and start-up businessmen and women, who risk their life-savings and put their mortgages on the line to create the next generation of companies ? Or our skilled tradespeople who run their own engineering and construction businesses?

Are these the people that Reeves hopes to tax now to the ground? That would be foolish since the top one per cent of the wealthiest in the country are the ones who pay nearly a third of all tax revenue raised by the HMRC.

Reeves doesn’t have many options left as she has also promised that there will be no increases to income tax, VAT or National Insurance. 

Technically, she could reverse the cut in NI which ex-Chancellor Jeremy Hunt introduced last March but if she were to do that, it would have to be considered a tax rise which means she breaks her pledge.

The Chancellor already has a few oven-ready taxes that we’ve have been warned about: VAT on private schools, a new and less generous residency scheme for the overseas wealthy to replace “non-dom” status as well as taking the ridiculous step of raising the windfall tax on oil and gas producers, already taxed at 75 per cent. 

One of her big earlier promises on cracking down on some of the most wealthy – stopping the tax relief on “carried interest” for those working in the private equity industry – is still being reviewed. Which is odd. Labour has had years to prepare for this category of wealth, so you do have to wonder whether there hasn’t been some special lobbying being applied behind the scenes? After all, some of Reeves’ biggest cheerleaders and supporters are deep in the industry themselves  such as asset managers like the US giant, BlackRock.  

To date, the policies already announced by Reeves to save money – scrapping winter fuel payments and scrapping certain infrastructure projects – amount to around £5.5 billion. 

What Reeves hasn’t dared yet talk about is improving productivity, either in the private or public sector which is absolutely ripe for efficiency savings and cost controls. That was a mistake: handing a 22 per cent pay rise to junior doctors has logic but only if the health secretary, Wes Streeting, can work with the NHS to improve costs and efficiencies. They are easy to find. 

That leaves a big chunk of money – £16 billion or so – to be found if she is to stick to her strict fiscal rules. And there are three tax takes which are ripe for plucking and she hasn’t ruled out: increasing inheritance tax and closing some of the reliefs for family-owned businesses, reforming capital gains tax to harmonise with income tax ( not a foolish move ) or reforming tax relief on pensions.  

Pensions are a sitting golden goose: around £2 trillion ($2.6 trillion) is held in UK pension funds and more than £70 billion is given in tax relief annually in pension savings every year. 

That does sound like a massive amount and therefore suggests there is room for tightening up. But pensions tax relief is also massively complex to reform – defined benefit schemes are also included which means public sector workers would also be affected. 

At present, higher rate tax payers get a higher relief on their pensions. Yet tax relief is not really tax relief at all as, while pensions are tax-free on the way into our pension pots, they are all then taxable. This is a deferred tax, not never paid. 

If Reeves wanted to be more radical in her approach, she would stay away from pensions for now – remember the chaos created by Gordon Brown’s tax on pension funds  – and look for a far more productive approach to how UK taxpayers can be attracted to save for their pensions in a fair and equitable manner while also being fairly taxed. 

What’s not surprising is that in just a few weeks into office, Reeves has come under fire from all sides of the political spectrum. Predictably, the Tories – specifically her former sparring partner, Jeremy Hunt – have attacked her for breaking promises and now putting up taxes. From the centre, independent economists such as Julian Jessop claim she’s acting as an “accountant” running “abacus”-style economists rather than looking ahead to find ways to promote growth. 

Yet the most ferocious attacks are coming from the old Labour side of the fence. They claim she’s acting like a slave to the old economic orthodoxy by not breaking the fiscal rules and finding ways to invest more for the future. There’s merit to their argument. 

Scrapping sensible hospital building programmes and transport links in the North where they are needed most to stimulate local economies is short-termist. Not putting a higher emphasis on greater productivity in the public sector is backward thinking.

Worse still, she’s been accused of misquoting John Maynard Keynes with her latest mantra – “we can only do what we can afford”. Yet what Keynes, believed by many to be the brain behind Britain’s post-war prosperity, actually said “we can afford anything we can do”.

An even greater danger is that Reeves’s message is so dour and so miserable that the brightest – and most innovative – will be driven to up sticks and leave for more welcoming countries. Thousands of millionaires and high net worth individuals have already done so. 

And those who can’t afford to move overseas will increasingly turn to the black market to do their business to avoid higher taxes. More than a tenth of the UK economy is already hidden away in the underground. 

If Reeves is not careful, growth in the black – and indeed the market for bartering services – will be her legacy rather than growth in the economy which she claims is her goal. 

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