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Will Labour raise taxes?

Taxes will rise whoever forms the next government, and that’s not a bad thing.

By Will Dunn

A key attack line the Conservatives will use against Labour in this election is the idea that the latter will raise taxes if it forms the next government. This insight comes from my interpretation of a few subtle indicators, such as the big red sign that Jeremy Hunt stood in front of last week that read: “Labour’s Tax rises”, and Hunt’s claim that Starmer will “help himself to you and your family’s wallets”.

The quickest and most doorstep-friendly response to this is that Jeremy Hunt has already raised taxes very significantly, not just now but for years to come. Hunt’s freezing of the income-tax thresholds extends to April 2028, by which time his decision will be lightening the nation’s wallets by an extra £33.6bn a year.

It is also dishonest to pretend that anyone is going to be able to “cut taxes” in any real sense in the next parliament. Whoever wins, the next government will be in a very tight fiscal position, and there are only two ways to deal with that: large spending cuts or higher tax receipts. The former is a non-starter because our public services are in a pretty dire state as it is, and austerity was the root cause of many of the social and economic problems Britain now faces. The latter could come from much stronger economic growth (which might happen, after a period of greater investment in our economy) or higher rates of tax. In the short term at least, there is really only one answer.  

It’s not just that Hunt wouldn’t be able to implement real cuts to personal taxes; to do so would be to repeat the error made by Liz Truss. In today’s world of high government debt, tax cuts are probably the worst thing you can borrow for.

To understand why, imagine two companies: one wants to borrow money because its CEO, who we’ll call Rachel, wants to build a new factory that will allow it to make and sell more stuff. The other company, whose CEO we’ll call Jeremy, wants to borrow to pay its staff more, because Jeremy says this will cause them to work harder and spend more in the company shop. Which sounds like a better investment?

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I spoke recently with Jagjit Chadha, director of the National Institute of Economic and Social Research, who told me that in Britain’s political arithmetic these two kinds of borrowing are equivalent, but financial markets don’t see it like that. The investors from whom the government borrows (by selling bonds) are “more likely” to back investment that is well explained and targeted, he said. “They won’t be very interested in increasing debt for tax cuts – we know that from the mini-Budget”, but properly directed public investment is “much more likely to be treated positively”.

Alongside better evidence and a clear plan, you also need to tell the markets that your debts will eventually come down, and that means not spending more than you have coming in. The government’s receipts have to match its total managed expenditure. To secure the public investments that would start the UK economy growing, Chadha told me, “we may need to accept a period in which taxes rise”.

Chadha said the people who should really accept this are the relatively affluent, with income in the 50th-90th percentile (roughly an annual salary of £30,000-£65,000), who make up about 41 per cent of households, but pay about 30 per cent of income tax. The amount paid by the better-off “could easily go up”, he told me, “and that would clear a large amount of the problem”.

The problem is that these are also the people who will decide Labour’s fate. I’m not a political strategist, but I’ve been on enough doorsteps to know that telling a moderately affluent voter in a Tory marginal “certainly, we’ll raise your taxes, but you deserve it because you’re actually the cause of our structural fiscal deficit” would not get you invited in for a cup of tea.

On the other hand, it’s true. People need to be told that if they want better public services and a growing economy, they will need to invest in them. Labour will have to be careful to avoid the seductive myth of “high-tax Britain”; higher taxes are part of the cure for our ailing economy.

This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here.

[See also: Dan Poulter: “I voted for policies that I would not now vote for”]

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