The ‘Conspiracy of Silence’ Surrounding Labour’s Covert Wealth Tax Strategy
Glaring Omissions in Party Manifesto Falsely Suggest Cost-Free Policy Implementation
Perhaps the most striking aspect of the Labour manifesto is not what it contains, but rather what it conspicuously omits.
Sir Keir Starmer, the Leader of the Labour Party, has categorically ruled out increases in several major taxes: income tax, National Insurance contributions, Value Added Tax (VAT), and the headline rate of corporation tax. This stance mirrors that of the current Prime Minister, Rishi Sunak, in what Paul Johnson, the esteemed director of the Institute for Fiscal Studies (IFS), has aptly dubbed a “tax lock arms race”.
However, the question that looms large in Johnson’s mind – and indeed, in the minds of many economic analysts – is which taxes Starmer does intend to raise, should Labour secure victory in the forthcoming general election.
The IFS chief has not minced words in his critique of both major parties, accusing them of engaging in a “conspiracy of silence” regarding the true magnitude of the economic and fiscal challenges that await the next government, regardless of its political affiliation.
Johnson asserts that the victorious party, upon assuming power, will face an unenviable trilemma: they must choose between raising taxes beyond the levels outlined in their manifestos, implementing further cuts to public spending, or increasing government borrowing. Given current polling trends and political forecasts, it appears increasingly likely that it will be Starmer grappling with this thorny issue come 5 July.
With characteristic frankness, Johnson states that it would be “a considerable surprise” if taxes were not raised over the course of the next five-year parliamentary term.
A perfect storm of fiscal pressures is brewing, which will likely force Starmer’s hand, according to the IFS’s analysis. These include enormous public spending demands, a commitment to reduce the national debt, spiralling debt interest payments, sluggish economic growth, and the demographic challenge posed by an ageing and increasingly infirm population.
Yet, even setting aside these formidable challenges, both major parties’ manifestos contain glaring gaps, as highlighted by the think tank. Labour and the Conservatives have both pledged to reverse a decade-long trend of increasing NHS waiting times, but neither has provided a clear roadmap for achieving this ambitious goal. Labour has additionally committed to formulating a strategy to reduce child poverty.
Johnson, speaking at a press conference on Monday, did not mince words: “Promises like these appear to imply all this can be delivered for free. It can’t.”
Given Starmer’s categorical rejection of increases to several major taxes, it is natural to speculate on where he might find the additional revenue required to fund these ambitious plans. Through a process of elimination, it seems increasingly likely that a raid on the wealthy may be on the horizon.
Helen Miller, the deputy director and head of tax at the IFS, suggests that wealth levies such as capital gains and inheritance taxes are among the most obvious targets for a Labour government seeking to boost revenue.
“If they want big money and they have ruled out the big taxes, then looking at capital incomes would be the place they would look,” Miller explains. “They are perhaps the most obvious in the sense that if you want something big and chunky, that’s where you’d turn.”
A clear target in this regard is capital gains tax (CGT). Currently, CGT contributes £15.2 billion annually to the Treasury’s coffers and is levied on profits from the sale of assets, including shares, businesses, and property that is not a primary residence.
At present, capital gains are taxed at lower rates than other forms of income, and there is growing speculation that this disparity could be addressed under a Labour government.
However, Miller cautions that more radical reform may be necessary to generate significant additional revenue: “If they wanted serious money – I’m talking about billions as opposed to just rounding errors – then they would have to actually start looking at serious reform.”
Such reform could potentially involve broadening the tax base by increasing the number of people subject to CGT and eliminating various existing reliefs.
While Starmer has explicitly ruled out introducing CGT on the sale of people’s primary homes, a new Labour government could explore ways to broaden the tax in other areas, Miller suggests.
Labour has consistently pledged not to “raise taxes on working people”, but closer scrutiny of this promise reveals that it specifically refers to income earned from work, leaving the door open for potential increases in taxes on investment gains.
According to a memo obtained by The Guardian, Labour estimates that raising CGT rates could generate an additional £8 billion for the public purse.
“We are starting from ground zero with our public services and infrastructure,” a senior Labour source confided to the newspaper. “We have to show we are serious about borrowing and raising revenue from taxes if investors are going to walk in step with us. These measures are part of unlocking wealth and putting it to work.”
Another potential avenue for increasing revenue could be through reform of inheritance tax, which currently contributes £7.5 billion annually to government coffers. According to The Guardian, a key measure under consideration by Labour is a clampdown on existing reliefs.
Current inheritance tax rules allow individuals to gift farmland tax-free upon death and to pass on certain business assets with 100% relief. Additionally, pension death benefits are typically exempt from inheritance tax. These are precisely the types of tax breaks that Starmer may seek to target.
Rachel Reeves, the shadow chancellor, has publicly denied that Labour has plans to raise taxes in an anticipated autumn budget, should the party win the general election. However, reports suggest that draft documents and analyses of revenue-raising policies have been circulating among senior party officials.
Yet, even if Labour does tighten the regime on inheritance taxes and launch a raid on investment gains, it may not be sufficient to meet the party’s ambitious spending plans and address the fiscal challenges facing the country.
As Johnson points out, “You can do some things with inheritance tax, some things on capital gains tax and some things with other taxes; you can start to raise noticeable amounts, but not really, really big ones.”
The substantial cost of Labour’s proposed policies, combined with the growing burden of both national debt and an ageing and increasingly ill population, means that even more groups could potentially find themselves in the crosshairs for higher taxes.
Johnson believes that motorists could eventually be hit with road pricing – a novel and potentially controversial new tax.
Fuel duty has been frozen at 2010 levels for the past 14 years, creating an increasingly large fiscal hole for future governments. Simultaneously, the ongoing shift towards electric vehicles means that this revenue stream is set to decline further, Johnson warns.
“Even if we manage to raise fuel duty in line with inflation for the first time in 15 years, [fuel duty revenue] is still going to go down and down as we move to electric cars. We need a government that is going to deal with road pricing, or some other way of getting some of that revenue back,” Johnson argues.
Speaking at a Bloomberg debate on Monday, shadow business secretary Jonathan Reynolds rejected accusations that Labour’s economic plans were “fanciful”. He asserted, “The answer has got to be breaking out of this low growth, high tax, poor services doom.”
One of Labour’s key pledges is to secure “the highest sustained growth in the G7”. If the economy grows more rapidly than current forecasts suggest, it would undoubtedly ease the strain on the public finances. Labour’s plans to reform the planning system could contribute positively to this goal, Johnson acknowledges.
However, the IFS chief warns that the party’s net zero ambitions may clash with its growth objectives. He argues that proposing to allocate £5 billion annually to green projects “is not the same priority as growth”.
Johnson contends that a new government genuinely prioritising growth would be more likely to invest in transport infrastructure or skills development, rather than focusing primarily on green initiatives.
Even if economic growth does exceed current forecasts, Johnson cautions that this would merely allow a new government to avoid planned cuts in public spending.
“It will not create a spending bonanza of any kind,” he warns.
As the general election approaches, the British public and economic analysts alike will be keenly watching for any further details or leaks regarding Labour’s fiscal plans. The tension between ambitious spending promises and the need for fiscal responsibility is likely to remain a key point of debate in the coming months. Whether Starmer and his team can successfully navigate this complex economic landscape while maintaining public trust and support remains to be seen.