Rachel Reeves ‘will have no choice but to hike taxes’ Treasury experts warn
Newly installed Chancellor of the Exchequer Rachel Reeves has no choice but to raise taxes and borrowing, Treasury experts have warned.
A range of senior figures, including ex-chancellor Philip Hammond, former Treasury officials and government advisers have spelled out what they believe Ms Reeves should do to boost public sector coffers.
In what has been dubbed the “blame document”, Ms Reeves is on Monday expected to tell Parliament that the Conservatives left Labour with a £20bn black hole in the accounts that she only found out about once she entered the Treasury.
However, many experts believe Labour was aware of the parlous financial picture because the figures were publicly available from Treasury watchdog the Office for Budget Responsibility (OBR).
On Monday, the Chancellor will argue the public finances are so bad that tough decisions will have to be made.
But Lord Philip Hammond, who was Theresa May’s chancellor between July 2016 and July 2019, claimed the state of the public finances were well-known before Labour won the general election.
“It’s a little bit disingenuous to pretend that she didn’t know she was going to have to make difficult decisions,” Lord Hammond told i.
“The first thing she should do is stop talking about it, because every time she utters something along these lines, she’s kind of disqualifying herself for the job.
“She’s made a strong point of her competence and her understanding of the issues, and then she’s undermining that by suggesting that she hadn’t got a clue. She hadn’t read the OBR or the Institute for Fiscal Studies stuff? I mean, the whole thing’s nonsense.”
The Chancellor is not expected to set out tax changes until the Budget, expected in October. It is understood that Ms Reeves has not yet begun the process of considering what measures to include in the Budget and is expected to wait until after the publication of the public spending audit on Monday.
While Lord Hammond does not believe Ms Reeves should raise income tax because “she’d be dead before she started if she did”, he does think she should raise some taxes, commit to a small increase in borrowing and reduce some tax reliefs in order to raise up to £8bn in the short term.
However, he also believes she should not detract from the Labour Party’s pledge to be a government of economic growth by hitting international investors too hard with big rises in business taxes.
“I’d be very surprised if she moves on the red line issues income tax, National insurance and so on,” added Lord Hammond, who believes she may also consider cutting back infrastructure projects such as the HS2 fast train link further and reviewing council tax bands.
“I suspect what she’ll do is a combination of cancelling projects, mainly capital projects, despite Labour always having argued that’s the last thing you should cut is infrastructure investment, but I bet that’s what they’ll do for quite a big chunk of it,” Lord Hammond said.
He added: “She’ll raise some other taxes, and I would guess that she’ll do it by a broad-based attack on what she will call reliefs and allowances and exemptions and privileges. That could see tax relief on pensions being diluted.
“But she should not provoke anybody too much that it forces them to stop investing in the UK, and then a bit more borrowing. If she sticks to a number of moves that each impact a few thousand people rather than hundreds of thousands, then she could also avoid impacting her economic growth plan.
“She will know this is a temporary thing as the forecast shows that over the next couple of years we will get borrowing back on track. So, to fix the immediate issue she will be taking lots of small snips, raising a few hundred billion here and there, and then when you add it all together, hey presto you’ve got a few billions, something like six, seven or eight billion.”
Others believe major infrastructure projects should be protected, and that Ms Reeves will break Labour’s manifesto pledge not to raise income tax.
Sir Philip Rutnam, a former Permanent Secretary at the Home Office and Department for Transport who oversaw Brexit preparations and the construction of HS2, told i the Chancellor must resist the urge to jettison major infrastructure projects including HS2 and the National Hospitals Programme.
He said: “It’s not surprising infrastructure budgets were over-committed before the election. The country urgently needs better transport and health infrastructure.
“If a reset is needed, I hope the Chancellor looks at phasing the works to make them affordable, not cancellation, which would mean throwing away years of preparation.”
There is speculation that Ms Reeves could announce delays or cancellations to a string of key rail and road schemes as soon as her speech on Monday.
Nimesh Shah, chief executive of tax and advisory group Blick Rothenberg, believes Ms Reeves “has no choice” but to break the party’s manifesto pledge to raise all income tax bands.
“If you want to raise the most money, you increase income tax, national insurance or VAT. Raising VAT is unlikely with the Labour Government, because it hits poorer families the hardest,” said Mr Shah, who has contributed to tax consultations within His Majesty’s Revenue and Customs and the Treasury.
“So, she’s left with income taxes, and I can see the basic rate going up 1 percentage point to 21 per cent, the middle rate going from 40 to 42 per cent and the top rate for those earning more than £125,000 going up from 45 per cent to 50 per cent.
Mr Shah calculates that these increases in all three income tax thresholds would raise £12.5bn, although £8bn would come from the lowest 21 per cent rate.
Another former Treasury figure Tim Leunig, who advised Rishi Sunak when he was chancellor, believes Ms Reeves should consider tax rises, inventing new taxes and extending the scope of taxes – such as Labour’s private school VAT policy.
He said that she could also consider eliminating the number of tax breaks in the British system.
Sir Geoff Mulgan, who served as the director of both the strategy and policy units in No 10 under Tony Blair and was chief adviser to Gordon Brown during his time in opposition, adds: “There are of course only three ways to bridge the gap. Raise taxes, and undoubtedly a review of tax is long overdue, cut areas of spending; or to economise.”
Sir Geoff told i that making saving by merging back office functions such as call centres through digitisation or improving efficiency by targeting policies towards expensive issues such as the reoffending of released prisoners should also be considered.
He added that while economising to improve public services was “not very familiar territory for Labour [it] will become increasingly important”.
James Meadway, a Treasury civil servant under Gordon Brown and former political adviser to John McDonnell, believes capital gains tax “should be the focus” of Ms Reeves’ fundraising efforts and that “austerity should be avoided”.
He also accused Ms Reeves of “using the same trick the Tories played in 2010, but when they weaponised Liam Byrne’s ‘no money left’ note”.
“The £20bn ‘hole’ in government spending plans was well-known and widely reported months before the election. To pretend this is a shock is at best disingenuous,” Mr Meadway said.