The taxes Reeves could raise to pay for Labour's about-turns

Telegraph

18 hours ago

Rachel Reeves faces another black hole in the public finances.
This time she can blame her own MPs: the revolt by more than 120 Labour backbenchers has forced the Prime Minister to back down on his proposal to slow the growth in the benefits bill.
Sir Keir Starmer's reforms were supposed to save £5bn per year. But now that he has performed another about-turn, the Institute for Fiscal Studies (IFS) estimates the scheme will only save £2bn, thus blowing a fresh £3bn hole in the Chancellor's numbers.
'These changes more than halve the saving of the package of reforms as a whole, making the Chancellor's already difficult budget-balancing act that much harder,' says Tom Waters, at the think tank.
It comes weeks after the policy reversal on winter fuel payments for pensioners, which will cost more than £1bn.
To make matters worse, the economy is slowing – in part because of Labour's record-breaking tax raids – which will undermine the tax revenues on which Reeves's plans relied.
Ruth Gregory, at Capital Economics, estimates the combination of higher benefits spending and lower growth will cost the Chancellor £22bn compared to the Office for Budget Responsibility's forecasts at the Spring Statement.
If MPs will not allow the Government even the most modest restraint on spending, and if the Chancellor will not again rewrite her own 'iron-clad' borrowing rules, that means more tax rises are on the way in the autumn.
Here are the options Reeves will be looking at.
Income tax
The Government's biggest revenue-raiser, income tax, raked in £310bn last year – almost precisely matching the £313bn spent on benefits.
Adding a penny to the basic and higher rates of income tax would bring in just over £10bn extra per year, according to HMRC estimates. That means at least 2p would need to be added to come close to repairing Reeves's Budget.
If it were not for Labour's manifesto pledge not to raise the tax, this would be an obvious place for the Chancellor to turn.
But the manifesto is hardly a meaningful constraint.
The vaunted document also promised not to raise National Insurance contributions (NICs), but the Chancellor did just that in her first Budget. The Government argued that the manifesto promise only applied to the NICs paid directly by workers, not the much larger share paid by their employers.
Income tax does not lend itself quite so easily to such a ruse, but the Chancellor could extend the Conservatives' long freeze on thresholds.
A classic stealth tax, this method means that as workers receive pay rises they are pulled more quickly into higher tax brackets – even if inflation means the spending power of their pay packets is not actually growing.
The freeze on thresholds, which is currently set to last until 2028, is already expected to bag the Chancellor nearly £50bn per year by the end of the decade.
Extending it by another two years would bring in an extra £10bn per year, the IFS estimates. Given the sums involved and the fact that stealth raids do not affect workers in an obvious way, this is seen as a likely option.
National Insurance
The Chancellor is unlikely to whack businesses with another raid. She has promised hostile bosses that she will not pull the same stunt on National Insurance contributions again.
Andrew Bailey, the Governor of the Bank of England, has also warned that last year's tax raid is now weighing on the economy, meaning increasing the rate again could be counterproductive.
But that does not mean the tax, which is set to bring in £200bn this year, has to go untouched. One option is to raise the rate paid by workers.
This would breach even the revised version of the manifesto pledge, but could be framed as reversing reckless Tory tax cuts – under Jeremy Hunt, Reeves's predecessor in No 11, the rate was chopped from 12pc to 10pc and then down to 8pc.
Each of those two percentage point moves cost more than £10bn, so reversing the cuts could help Reeves considerably.
Capital gains
Increasing the rate of capital gains tax (CGT) is popular in Left-wing circles.
Unfortunately, jacking up the tax paid on profits made from the sale of assets comes with a range of downsides, which can result in a higher tax rate in fact costing the Treasury revenue.
A large share of CGT is paid by a very small number of people. If the higher rate means they simply decide not to sell their assets, then the tax take will plunge in short order.
HMRC estimates that a one percentage point increase in the top rate ends up costing the Treasury £30m per year. A 5p increase costs £870m per year. A 10p jump loses a staggering £3.6bn per year for the public purse.
As a result, increasing the rate of CGT seems unlikely.
VAT
Another option ruled out in the manifesto, this levy on a large share of the things people buy is on track to bring in £200bn per year by the end of the decade.
Currently charged at a rate of 20pc, increasing VAT might not be the most popular measure when households are already reeling from a cost of living crisis.
None the less, it could be a tempting option when a 1p increase brings in £9.6bn per year.
Alternatively, the Chancellor could slap the tax on items that are currently exempt – as she did with private school fees this year – or those that attract the reduced rate of 5pc, such as energy bills.
Fuel duty
Reeves has maintained the accounting wheeze employed by successive Conservative chancellors: freeze fuel duty year after year but pencilling in extra revenues from future increases.
About half of her headroom comes from the official assumption that the tax on petrol and diesel will rise in future – yet few expect she will actually jack up the cost of driving.
The fuel duty escalator has been frozen for a decade and a half, making it politically difficult to unfreeze. Most economists believe it will be kept frozen.
It would be a shock to voters, but Reeves may find it an attractive revenue-raiser: reintroducing inflation-linked increases in fuel duty would raise an estimated £5bn a year.
Banks, shares and child benefits for high-earners
It is not just the big taxes that are on the table.
Angela Rayner, the Deputy Prime Minister, wrote to Reeves with a raft of proposed tax increases ahead of the Spring Statement.
Suggestions included: a higher bank surcharge, raising up to £700m from lenders; scrapping inheritance tax relief on Aim-listed shares, for anywhere between £100m and £1bn; removing the dividend allowance to bag £325m, as well as raising the tax rate on dividends; and further freezing the threshold at which high earners pay the additional rate of income tax.
Raising the tax on enveloped properties, which are largely owned by companies, could raise another £200m, while closing a commercial property stamp duty loophole could net £1bn. Reinstating a lifetime allowance on pensions contributions might gain close to £800m per year.
Rayner also suggested clawing back more child benefit from higher-earning households, for £600m, and tightening migrants' access to benefits.
Together those measures could increase the Treasury's haul by £4.6bn or more.
That would be useful, but is barely enough to cover the cost of Starmer's latest about-turns, let alone cover the other costs. The scale of spending commitments mounting up means Reeves is facing unpalatable choices when it comes to the Budget.