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Self's assessment: fiscal straitjackets

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Last February, I wrote in this journal about the key factors the political parties should consider when writing their manifestos for the General Election. I said that it was simply not possible to reduce taxes, spend more on public services and borrow less, and that politicians of all parties should accept that choices need to be made. Sadly, my advice has been almost totally ignored, with the only exception being a promise from Labour to provide more funding to HMRC to improve systems and compliance (which I welcome).

A self-imposed straitjacket…

Both the Labour and Conservative parties have put on a self-imposed straitjacket, promising not to raise the rates of income tax, VAT and NIC. Given that these three taxes raise around 70% of total government tax receipts, this makes the prospects for any significant tax reform in a new government disappointingly low, although Jeremy Hunt has said that he wants to address some of the high marginal rates in the tax system (such as the one caused by withdrawing the personal allowance for those earning over £100k). It is less likely that Labour would see relief for such relatively high earners as a priority. Both major parties have also signed up to fiscal rules which require debt to be falling as a percentage of GDP by year five of a parliament (conveniently sufficiently far off to give some room for manoeuvre early in a parliament). However, Labour’s commitment is slightly different, and focuses on day to day rather than capital spending. Economist Andrew Sentance, writing in The Times (10 June), calculates that this may give Labour additional headroom of some £25bn to £55bn over the life of the next parliament.

The specific promises by the two major parties are relatively modest, compared to total tax receipts of around £700bn. Labour’s VAT on private school fees is estimated to raise around £1.5bn, while stopping the carried interest loophole raises around £600m. They estimate that non-dom measures, plus ‘reducing avoidance’ will raise £5.2bn and increasing the windfall tax on energy companies will bring a further £1.2bn. Meanwhile, the Conservatives will give away a further £10bn in cutting employee NICs and £1.7bn by abolishing NICs for the self-employed, as well as spending £2.2bn on reintroducing an age related personal allowance for pensioners (so that they are protected from the fiscal drag caused by freezing personal allowances while increasing the state pension). They will also raise around £5bn by closing the tax gap. Overall, Ben Chu (BBC Policy & Analysis Correspondent) calculates that, by 2028/29, Labour will increase taxes by £8.5bn in 2028/29, while the Conservatives will reduce them by £10.6bn. However, both parties will continue to freeze personal allowances, which the OBR calculated in 2023 would be worth £29.3bn by 2027/28 – equivalent to around 4p on the rate of income tax.

Optimistic claims on tackling avoidance

All of the major political parties (Conservative, Labour and Liberal Democrats) promise to raise between £5bn and £7bn by reducing the tax gap, with a particular focus on avoidance and evasion. Given the number of anti-avoidance measures, and the GAAR, which have been introduced in the last few years, it seems optimistic to assume that there is any further low-hanging fruit to be harvested. Tax Policy Associates’ Dan Neidle analyses the figures in his review of the Conservative manifesto and concludes that the Labour and Conservative figures are ‘ambitious but may be achievable’, while being less optimistic about the Liberal Democrats’ figure. I am, however, encouraged that despite the reference to ‘reducing avoidance’ in their manifesto, the Labour party’s more detailed document (Labour’s plan to close the tax gap) focuses more on boosting compliance activity and investing in technology.

Conspiracy of silence?

In looking at the manifestos, it is important to focus on what they do not say. The Conservatives have sought to portray Labour as a party which will raise taxes if they win the election, and have done their best to run scaremongering stories with little basis in fact – such as the idea that Labour would impose CGT on a person’s home, which Labour have now specifically denied. Both Keir Starmer and Rachel Reeves have been very disciplined in response to press questions, repeatedly saying that they have ‘no plans’ to raise taxes, other than the specific points in their manifesto. This would, for example, mean that they could reform and simplify CGT – perhaps increasing reliefs for business assets (remember that it was Labour which originally introduced Entrepreneur’s Relief, replacing Business Asset Taper Relief in 2008), while imposing higher rates on other assets. On pensions, Labour appear to have accepted that reintroducing the Lifetime Allowance would be extremely complex, but they may return to their earlier support for restricting relief for pension contributions to basic rate (even though this would be complex for defined benefit schemes, such as the NHS scheme).

Overall, it seems clear that the Conservative party do not expect to be in power after 4 July, and so can promise tax cuts that they don’t expect to have to fund. Labour are being cautious and disciplined, but will face major challenges in funding improvements to public services while controlling borrowing and not implementing significant tax rises. As Paul Johnson of the IFS said, ‘Labour continues in a conspiracy of silence on the difficulties they will face.’