Latest news with #publicfinances
The Independent
6 hours ago
- Business
- The Independent
What can Rachel Reeves do to pay for Starmer's welfare U-turn?
Taken together, the cost to the public finances of recent reversals on welfare payments is estimated to be around £4.5bn. Restoration of the pensioners ' winter fuel payment for most recipients will cost some £1.2bn, while keeping the present arrangements on personal independence payment and the health element of universal credit will mean the chancellor loses some £2.1bn and £1.1bn, respectively. While these aren't catastrophic changes in a total public spending universe of about £1.3 trillion, Rachel Reeves allowed herself very little fiscal headroom. So she'll be looking to make up for the cost of the recent U-turns. Given that she's only just delivered a spending review that set out plans for the next three years, including tighter budgets for many government departments, she is reportedly more willing to consider tax hikes. The uncertain outlook for economic growth will make her even more cautious. Despite constraints, she has some options… What won't Rachel Reeves do? All the signs are that she won't make any further changes that could be interpreted as a direct contravention of the 2024 general election manifesto promise: 'We will ensure taxes on working people are kept as low as possible. Labour will not increase taxes on working people, which is why we will not increase national insurance, the basic, higher, or additional rates of income tax, or VAT.' The 2 per cent hike in employers' national insurance at the last Budget hit smaller businesses quite hard, and will affect wage rises, so it was very close to the letter of that pledge. She's not going to go there again. But bear in mind that the freeze on tax thresholds will remain in place until 2028 – a hidden rise in income tax for many. Is anything else ruled out? Lots: there's a whole herd of sacred cattle that she can't touch, politically. These include the rate of corporation tax, about which the manifesto says: ' Labour will cap corporation tax at the current level of 25 per cent, the lowest in the G7, for the entire parliament'. Slapping VAT on zero-rated items is effectively ruled out, as are increases in most other business taxes. There's zero chance of any further capital gains tax being applied to homeowners, which would make eminent economic sense but would be electoral suicide. Reeves may also have run out of scope for squeezing rich non-doms – for fear of ending up with lower tax revenues due to flight and increased avoidance. Council tax procedures are being tweaked, but there is little chance of any thorough reform of the eccentric system of local government finance; memories of the imposition of the poll tax remain raw, almost four decades on. The big picture here is that the UK tax base is artificially narrow, for historical and political reasons. For example, personal taxation in the UK is still low by international standards, even when the overall tax burden is near a post-Second World War high, but UK business rates are correspondingly high and uncompetitive. Wealth is taxed marginally and haphazardly. This is bad for long-term growth, and every year means taxes are loaded too high onto a too-narrow base. What is an easy hit? Capital gains tax, as usual, but again Reeves will need to be careful not to go too far and risk discouraging savings and encouraging avoidance. The same goes for changing the rules on personal pensions: higher-rate tax relief on contributions and reducing the tax-free allowance for a cash withdrawal from a pension pot. Given the need for orderly retirement planning, radical changes would be undesirable and unpopular. But there could be adjustments. Will petrol go up? It certainly should. Unbelievably, fuel duty has been frozen since 2011, at 57.95p per litre, with an additional 5p per litre 'temporary' cut in 2022 to ease the cost of living crisis. Technically, this is due to be ended next year, with the duty now scheduled to rise. For Reeves to raise more than planned she'd have to up it by, say, 10p per litre. It would raise enough to pay for the U-turns, but would attract the scorn of the motorist and 'white van man'. The wider problem here is that the switch to electric vehicles is already depressing fuel duties. Sin taxes? Alcohol and tobacco are mostly maxed out, but there's still some scope with online gambling and duties on sugary and fatty foods. The sugary drinks levy worked very well on health grounds alone, but any 'tax on food' has always been anathema to the British public (albeit VAT is levied on confectionery). Reeves will also be mindful of the great 'pasty tax' fiasco of 2012 when George Osborne tried to make some rational changes to the VAT regime, including on 'ambient' takeaway food. His 'omnishambles' Budget soon collapsed, and Greggs customers have steadily got flabbier in the succeeding years. Rachel will be steering clear. What does the Labour left want? A wealth tax: a 2 per cent levy for those with assets in excess of £10m. No chance. What about a tax on interest the Bank of England pays the banks on deposits? That does crop up as a suggestion. It's very abstruse stuff, but this basically boils down to another tax on the commercial banks. It isn't paid by 'rich bankers' as such (though it might dent some bonuses) but by the banks themselves. Other things being equal, it would mean lower returns for savers, less availability of business finance and mortgages, and a less resilient banking system. The Bank of England says it could make managing monetary policy more difficult. But it could reduce the cost of borrowing to the Treasury by maybe £10bn a year. The chancellor may find the temptation irresistible.
Telegraph
9 hours ago
- Business
- Telegraph
As Rayner and McSweeney sealed £3bn U-turn, Reeves looked at tractors 140 miles away
Rachel Reeves was looking at tractors when a new £3 billion black hole was blown in the public finances. Thursday was a hi-vis day for the Chancellor, who sported a fluorescent green waistcoat for her visits first to a nursery supplier and then JCB World Headquarters in Rocester, Staffordshire. The business tour was an attempt to drum up interest in the Government's new trade strategy. However, 140 miles south, a huge about-turn on a welfare cuts package that Ms Reeves had personally demanded was being bartered away in her absence. Morgan McSweeney, Sir Keir Starmer's chief of staff who masterminded Labour's huge general election victory, was one of the three figures present to negotiate the new terms. That was notable – the softly-spoken Irishman had been the target of vicious briefings from rebels, some of whom darkly muttered about ousting him in a 'regime change'. Angela Rayner, the Deputy Prime Minister, was the most senior elected figure in the room. As the most prominent Left-winger in the Cabinet, and privately a critic of the welfare cuts when they were first adopted, she was deemed best placed to win rebels over. The third member of the Government's negotiating team was Sir Alan Campbell, a Labour MP since Tony Blair's 1997 victory, who is now Sir Keir's number-cruncher as Chief Whip. Ms Reeves's absence was eye-catching. Would it not have been wise to have the person in charge of the nation's finances in the negotiations as billions of pounds were being bandied around? Apparently not. Treasury sources have waved away the idea that she was out of the loop. Ms Reeves was kept abreast of negotiations by Mr McSweeney personally, taking calls and texts as she toured the nursery manufacturers and construction companies of Middle England. Negotiations between the rebel leaders, who threatened to vote down flagship welfare legislation next Tuesday, and the three Government figures hand-picked to offer concessions did not happen in Downing Street. Instead, it took place in the Palace of Westminster to avoid drawing attention to what had snowballed into the biggest rebellion of Sir Keir Starmer's year-old premiership. 'It was somewhere on the parliamentary estate where you would not expect it to happen,' said a source tapped into rebel strategy. But the location had symbolism, too. This was the home turf not of ministers, but MPs. A total of 127 Labour backbenchers had publicly attached their names to an amendment to effectively kill off the cuts to disability benefit payments. It was enough to comfortably overturn Sir Keir's vast Commons majority, and No 10 knew it. So it was the Government that came, cap in hand, to the rebels – and not the other way round. The rebels were headed by three Labour MPs – Dame Meg Hillier, Debbie Abrahams and Helen Hayes. Each of them leads a Commons select committee, respectively scrutinising the Treasury, the Department for Work and Pensions and the Department for Education. These were not your usual Left-wing parliamentary agitators but moderate, highly respected Labour MPs. The profiles of the masterminds behind the amendment reflected the core strength of the rebellion, and how widely across the Labour backbenches it reached. Meetings had taken place on Wednesday too, but came to a head around lunchtime on Thursday. Critics were said to be pushing for moderate tweaks – perhaps a change in exactly how the new points system would work for recipients of the personal independence payments (Pip). Cuts to Pip, which gives money to people with disabilities to cover the extra costs brought about by their condition, was at the heart of the stand-off. However, the rebels went much further. The rebels insisted central parts of the package, which the Prime Minister had defended as recently as Wednesday and dismissed criticisms as 'noises off', had to go. The Government team, so exposed by the size of a rebellion that had caught them off guard, was left with little power to argue back. And so there was celebration from the three committee heads, whose actions were driven by a sincere concern about the 800,000 disabled people who would lose out under the initial plan. 'Major concessions' had been won, a senior rebel source told The Telegraph on Thursday evening, adding: 'We wanted to unite around something better. We are getting there.' As news of the victory spread, the full scale of the concessions began to leak. Gone was the plan to cut Pip from existing claimants, meaning 370,000 disabled people would keep their payments in full. Those currently receiving the health top-up to Universal Credit would also be spared. The U-turn also allowed the rebels to reassure constituents that current claimants would not lose out, after MP inboxes had flooded with concerns from residents. There were other concessions too, such as speeding up the new £1 billion fund to help people get back into work and a promise to properly consult with disability charities before the new system kicks in. In a sign of how scrambled negotiations had been, Liz Kendall, the Work and Pensions Secretary who put the initial package together, sent a letter out to Labour MPs explaining the new deal at 12.27am. Formal government communications issued after midnight are usually a tell-tale sign that all is not going to plan. The rebels had won. The Iron Chancellor's tab But Ms Reeves now has to pick up a tab. The promise that current Pip and Universal Credit recipients will remain untouched is a costly one. The rollback of the benefits cuts has created an estimated £3 billion dent in original savings of £4.6 billion savings from the original package. Given it was Ms Reeves herself who insisted that the cuts were announced before her spring statement in March to help balance the books, it is hard to not read the climbdown as a Treasury defeat. The Chancellor is already facing an incredibly tough autumn Budget. Worsening economic forecasts and increased government debt interest payments mean she is at risk of missing her promises to control borrowing. But No 10's newly-found penchant for U-turns is making her task much harder. The recent reversal on the winter fuel payment cut lost her £1.5 billion. Sir Keir has also hinted at lifting the two-child benefit cap, which would cost another £3.5 billion. The 'Iron Chancellor' has staked her credibility by sticking to her fiscal rules. A determination not to break them could well mean substantial tax rises are coming, clashing with another of her past positions – that she would not impose more tax rises before the general election. Reeves in 'deep trouble' Those in the Chancellor's inner circle insist there are still a 'huge number of moving pieces' between now and the autumn Budget, including new growth and productivity forecasts, energy price changes and interest rate decisions from the Bank of England. Officials widely expect the Bank to cut rates in the coming weeks, in line with external forecasts, which would reduce the cost of borrowing for the Treasury. The Office for Budget Responsibility's (OBR) latest forecast predicts that debt interest payments will exceed £100 billion in this financial year – accounting for more than eight per cent of total public spending. But polling shows that two thirds of Labour MPs oppose the party's fiscal rules, and see breaking them and borrowing more as the best solution to the Chancellor's dilemma. 'It's hard to forgive her for where we are now,' said one MP. 'She chose to target the poorest.' There are few MPs now openly discussing Ms Reeves leaving the Government, but most are calling for a 'reset' in Downing Street, and for Sir Keir to consider his political strategy more carefully. One rebel said simply that based on the economic statistics alone, the Chancellor is in 'deep trouble'. Dr Simon Opher, another of the rebels, said: 'The changes do not tackle the eligibility issues that are at the heart of many of the problems with Pip. 'The Bill should be scrapped and we should start again and put the needs of disabled people at the centre of the process.' On Friday, some rebels were vowing to continue the fight. Members of the Socialist Campaign Group, made up of a few dozen Left-wingers, plan to vote against the welfare legislation on Tuesday. Exact numbers remain to be seen. But government insiders and decisive rebel leaders are confident enough critics will support the new package that the legislation will comfortably pass. The Chancellor is left to clean up the mess. She could yet still dig herself out of this growing fiscal hole come autumn – but it may well be the public that ends up paying.
Telegraph
10 hours ago
- Business
- Telegraph
The taxes Reeves could raise to pay for Labour's about-turns
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.
The Independent
16 hours ago
- Business
- The Independent
Starmer's benefits U-turns will cost £4.5bn, warns influential think-tank
Sir Keir Starmer 's U-turns on benefit cuts and winter fuel payments have blown a £4.5bn hole in the public finances that will need to be filled with tax hikes or deep spending cuts elsewhere, a top economic think tank has warned. The prime minister 's climbdown over his welfare bill is even bigger, and far more expensive, than expected, Resolution Foundation analysis found. And, combined with last month's U-turn on winter fuel payments, Sir Keir will now need to find almost £5bn ahead of his chancellor Rachel Reeves ' autumn Budget. The Resolution Foundation said the change to Sir Keir's welfare bill, which will protect all those currently receiving personal independence payments (Pip), the main disability payment, will prevent 370,000 from losing the support. That will cost £2.1bn per year by 2030, while protecting the income of all those receiving the health element of universal credit, affecting 2.2 million people, will cost up to a further £1.1bn each year. It wipes out up to £3.2bn of the £5bn the government had hoped to save through the changes. The Institute for Fiscal Studies had warned the U-turn would cost around £1.5bn, which wold have to be funded by tax hikes or spending cuts elsewhere. And, on top of the £1.3bn decision to reinstate winter fuel payments for 7 million pensioners, Sir Keir's month of U-turns has left him grappling with the £4.5bn black hole in the public finances. Care minister Stephen Kinnock was asked how the government will pay for the changes, but refused to 'speculate'. He said the chancellor would confirm how the U-turns will be funded when she delivers her Budget in the autumn. It comes after Sir Keir made major concessions to Labour MPs plotting to thwart his controversial welfare bill. In a late night climbdown, the PM offered to protect Pip for all existing claimants and promised a review of the Pip assessment to be led by disabilities minister Sir Stephen Timms and "co-produced" with disabled people. A Number 10 spokesperson said: "We have listened to MPs who support the principle of reform but are worried about the pace of change for those already supported by the system. "This package will preserve the social security system for those who need it by putting it on a sustainable footing, provide dignity for those unable to work, support those who can and reduce anxiety for those currently in the system." Dame Meg Hillier, one of the leading rebel voices, described the concessions as "a good deal" involving "massive changes" to protect vulnerable people and involve disabled people in the design of future reforms. She said: "It's encouraging that we have reached what I believe is a workable compromise that will protect disabled people and support people back into work while ensuring the welfare system can be meaningfully reformed." Some Labour rebels are sticking to their guns and will still vote against the bill on Tuesday, but it is likely now to have enough support to pass the Commons. He had been facing a humiliating defeat, with more than 120 Labour MPs having signed a rebel amendment seeking to kill the bill. As well as blowing a major hole in the government's spending plans, campaigners warned the chaotic U-turn sets up a two-tier system for Pip claimants, where those on the new system face different criteria to those already receiving payments. Ruth Curtice, chief executive of the Resolution Foundation think tank, told BBC Radio 4's Today programme: 'It's certainly the case you will have two recipients with the same scores on Pip assessments, one will be eligible and one won't be under this system for a period of years. "On the other hand, it is not unusual to introduce changes to the disability benefits system this way, where there are some more protections for existing recipients and that is not just a political question, I think it is also the case that losing substantial amounts of money can have a bigger impact on families."
Times
18 hours ago
- Business
- Times
Rachel Reeves ‘must raise taxes' after welfare and winter fuel U-turns
Rachel Reeves is likely to have to raise taxes to pay for the £4.5 billion cost of Labour's U-turns on welfare and winter fuel payments, leading economists have said. The Resolution Foundation said the government's decision to protect existing claimants of disability and health benefits from the impact of welfare reforms will cost about £3 billion. The decision earlier this month to restore winter fuel payments for millions of pensioners will cost another £1.5 billion. The strain on the public finances has been increased by global economic turbulence and the anaemic levels of economic growth. Ruth Curtice, chief executive of the Resolution Foundation, told BBC Radio 4's Today: 'Altogether they are looking for over £4 billion. They have completed their spending review, which means that spending totals for departments are set. Revisiting that will be very difficult. 'Presumably, after this, looking for further savings from the welfare budget would be quite challenging so that leaves only extra borrowing, which the chancellor doesn't have much space for unless she were to change her fiscal rules or tax rises.' The prime minister offered to water down the cuts during talks with senior backbenchers after accepting that he could not force the bill through unchanged, given that more than 120 MPs publicly oppose it in its current form. The scale of the climbdown is even bigger than expected. In a move that would cost the Treasury £1.5 billion, Starmer has offered to restrict changes to personal independence payments (PIP) to new claimants, protecting 370,000 existing recipients who have been vocal over their concerns. Claimants of the health element of universal credit — paid to those who are unable to work — will also be protected. The government had planned to freeze the benefit until 2029-30 in a move that would have resulted in 2.2 million people facing a cut of about £450. The reversal is expected to cost another £1.5 billion. Restoring winter fuel payments to 7.5 million pensioners will cost the government about £1.5 billion. The decision to abandon some of the government's flagship pledges will increase pressure on Reeves ahead of the autumn budget. Economists believe tax rises are inevitable. Meg Hillier, the MP for Hackney South & Shoreditch, one of the leading welfare rebels, said she would now support the bill. She said: 'This is a positive outcome that has seen the government listen and engage with people, the concerns of Labour MPs and their constituents.' However, one rebel, the Nottingham East MP Nadia Whittome, said on Friday morning that the concessions were 'nowhere near good enough', and would create a 'two-tier' benefits system. When asked if she had been persuaded to back off, she told Today: 'In short, no. The existing claimants will obviously be relieved, but there will still be £3 billion of cuts made here which will push people into poverty. 'Even these revised proposals are nowhere near good enough and frankly are just not well thought through. It would create a two-tier system in both PIP and the universal credit system when somebody became disabled.' She said the bill would 'punish' people for trying to work, because the planned cuts would now only affect future claimants. 'Say you're on universal credit now, you do what the government tells you to do and you get a job, your health worsens in a few years, you need to go back on universal credit but you get less — that risks punishing people who are finding work which is the exact opposite of what the Bill is trying to do,' Whittome said.
