Labour’s fate might already be decided – but Budget measures still seem far from settled

Paul Montague-Smith, senior counsel – public affairs at MRM, looks at the range of possible tax changes coming in the Budget amid historic unpopularity for the Labour Government.

Perhaps the Labour Government’s fate is already sealed. YouGov’s most recent survey shows 70% of voters disapprove of the Government’s record to date. Only 12% appear happy with its performance. Even 50% of Labour voters at the last election say they are unhappy.

With immigration and asylum now as important as the economy in voters’ minds, 79% think the Government is doing badly on that issue. On the economy itself 77% think the same, with only 14% saying the government is doing well.

Maybe then, just 18 months after their landslide victory, it’s already too late for the Prime Minister and Chancellor to turn things around. But even if that’s the case – and one thing politics has shown in the last decade is that what you think will happen probably won’t – the Budget on 26 November will be a big moment for them and the Government as a whole.

The speculation around what the Chancellor might do has been rife. How much has been down to kite-flying by Treasury sources and how much by media click-baiting we don’t know.

But it almost certainly will have been damaging, to the economy and perhaps to individuals’ finances by scaring people either into not doing something they otherwise would or taking pre-emptive action that might not be in their best interests.

We don’t know what the Office for Budget Responsibility (OBR) forecast says but having raised around £40 billion of taxes at the last Budget – and having said she wouldn’t – the Chancellor is set to come back for more. The expectation is that she will want to end up with more than the wafer-thin headroom she left herself last time.

With Government borrowing higher than forecast, debt interest payments up and productivity growth seemingly downgraded by the OBR, the Chancellor is thought to need at least £20-30bn just to get the public finances back to where they were after the last budget, let alone build up a sensible buffer for the rest of the Parliament.

How will she do it? She has said that both tax and spending will have a role to play. Breaking Labour’s manifesto commitments on one or more of income tax, national insurance or VAT would be the simplest and most effective but would probably leave them dead in the water politically.

It’s unlikely that blaming it on Brexit and the OBR would wash with voters. ‘Stealth taxes’ can raise big money. When Rishi Sunak announced the income tax threshold freeze in 2021 it was expected to bring in £10.5 billion a year more by 2025–26. It’s now expected to be £26.8 billion a year. Extending the freeze further is therefore a prime candidate. Current VAT exemptions will also likely be under the spotlight.

If you don’t touch the main rates of the big taxes, you’re looking at having to introduce a whole range of measures to hit the number that the Chancellor needs to find. The next big money raisers are corporation tax, council tax, business rates and fuel duty.

The Government has committed to leave the main rates of corporation tax alone, but reliefs and exemptions are theoretically fair game. The problem is that these were designed to encourage investment and growth, exactly what Labour says is its central mission.

There has been speculation about a wholesale reform of council and property taxes, with the replacement of stamp duty and council tax with an annual levy and a tax when selling rather than buying a property. Anything that radical probably couldn’t be introduced quickly.

A ‘mansion tax’ has been floated, as has removing the Capital Gains Tax (CGT) relief on primary residences. Valuing properties for an annual mansion tax wouldn’t be straightforward. Similarly, working out CGT on a property that may well have been significantly renovated, extended and improved over the years is a potential minefield.

The most recent rumours are that for administrative simplicity the Chancellor is instead looking at higher council tax for higher banded properties.

Remarkably – and a testament to the lobbying campaign around it – fuel duty has been frozen since 2011 and was even cut in 2022. As a chunky money raiser, it may be time for the freeze to be thawed. But having said she wants to reduce the cost of living for working people, the Chancellor will probably want to avoid touching this if possible.

While a new wealth tax is favoured by Labour party members it appears to have been ruled out. It would be fiendishly difficult to implement and could drive even more wealthy taxpayers abroad. The top 1% of taxpayers currently pay around a third of all income tax collected (which appears to be reducing), with income tax being by far the government’s largest single source of revenue.

Given the amounts of money involved, pensions are of course in the spotlight. The Institute for Fiscal Studies (IFS) has highlighted that if the Chancellor capped relief on pension contributions to 20% it could raise around £22 billion in 2029-30. But it has warned strongly against doing so, for reasons of principle and practicality, including possible double taxation and serious practical difficulties for defined benefit schemes.

Instead, it suggests the Chancellor looks at the avoidance of employer National Insurance Contributions (NICs) through salary sacrifice schemes. It thinks a radical approach could raise £6 billion a year, but the Chancellor will remember the heat she felt from the business community when she raised employer NICs through the last budget.

The IFS has also suggested that pensioners could pay NICs on their income, which could raise around £1 billion a year, on the basis that there seems little reason for those working above pension age to be treated differently to other workers when NICs are effectively a tax.

Speculation is also once again ripe about the tax-free lump sum, which the IFS thinks should be reformed as it provides the largest benefit to those with the highest incomes in retirement and subsidises saving for those who have built up big pension pots. With the political cover that support from the respected IFS provides, the Chancellor could well pursue these suggestions.

While the Chancellor shied away from reducing the cash ISA limit at the last budget following warnings from lenders about the impact on their funding costs, she may decide to bite the bullet following the Treasury Committee’s critical report on their value for money and her desire to encourage people to invest more, particularly if Treasury officials have since done some analysis and concluded that lenders’ warnings last year were over-hyped.

While there’s a whole smorgasbord of possible tax levers that the Chancellor can pull – including increasing bank taxes given their healthy profits and introducing an ‘exit tax’ on those leaving the UK – unless there is equivalent action on government spending there is again the danger that the Budget could work against the economic growth that the Government so desperately needs in order to turn its political fortunes around.

Interestingly, some studies conclude that spending-based fiscal consolidations generally lead to a more sustained improvement in public finances at a lower cost to economic growth. Recent history, though, suggests that the Prime Minister isn’t prepared to face down his back benches to limit growth in public spending, and the Chancellor appears keen to protect her investment plans, which she believes will help future growth.

It’s therefore the spending side of the equation that might be particularly interesting and something I’ll certainly be looking out for on 26 November.