Mark my words: tax rises are coming
After Rachel Reeves’ tax raids of over £40bn in her 2024 Budget and £26bn in the 2025 edition, it should be inconceivable that John Healey will come back for more. Yet all the sights point in that direction, says Emma Revell
No City AM reader could be unaware that Britain’s current economic outlook is not exactly rosy. The economy’s performance over the last 20 years has left us stagnant, sluggish and struggling to attract the investment we need. Without the City of London and our financial services sector, we’d be in an even more precarious position.
Sadly, I don’t bring good news. In fact, I suspect the next 12 months, perhaps even 2027 as a whole, will see things get much worse. And despite the new government still being in its infancy, there is very little it can do about it – because Andy Burnham and his Chancellor have already boxed themselves in.
Take where we are now.
The latest jobs figures show employers shedding staff at the fastest rate in nine months. Youth unemployment has reached 16.4 per cent, its highest since 2014, and the private sector payroll is shrinking, down 34,000 jobs in August alone.
This isn’t a blip: it’s an economy responding in exactly the way you’d expect – and many predicted – to higher employer National Insurance, above-inflation increases to the minimum wage, an Employment Rights Bill that makes it riskier and more expensive to employ someone, and rising bond yields and energy prices.
Businesses are also openly pushing back. This week, business groups including UKHospitality, Build UK and Family Business UK – representing more than 200,000 firms – wrote to the Chancellor pleading with him to reverse last year’s raid on business property relief. The ‘death tax’ caps full inheritance tax relief for family firms at £1 million, meaning successful businesses may be broken up, sold, or moved abroad rather than passed on to families who want to continue running them.
When the very people the country is counting on to hire and invest are writing open letters begging the government to change course, something has gone deeply wrong.
Labour is choosing decline
Then look at what we know, or strongly suspect, is coming.
Thanks to the triple lock, earnings growth of around four per cent means our state pension obligation will continue to climb, with the Institute for Fiscal Studies warning earlier this week that the total cost may hit £154bn this year. And it could be worse. Paul Dales, UK chief economist at Capital Economics, forecasts that September’s inflation rate could be around 3.6 per cent, with a high of 4.2 per cent coming down the line in January. If that turns out to be an underestimate owing to the continued instability in the Gulf, the inflation element of the triple lock would set the increase rather than the earnings component, and John Healey would be hit with an even bigger hike in one of his largest accounting lines just days before he stands to deliver his first Budget.
Speaking of the Gulf, Bloomberg Economics recently published a forecast suggesting energy bills could jump by £427 in January under Ofgem’s energy price cap, which would amount to a 25 per cent increase in a typical household’s annual energy bill. So not only is the economic outlook chilly, a cold winter could mean we are quite literally freezing.
So what, if anything, can the government do about it?
A plethora of organisations, including the Centre for Policy Studies where I work, have argued voraciously for the removal of the triple lock. My colleague Daniel Herring called the policy a ‘time bomb’, highlighting figures which show pension spending will rise from 5.1 per cent to 7.8 per cent of GDP by 2070. Yet reforming the policy is believed to be so politically toxic that no major party on the left or the right will publicly countenance it.
Likewise, the sort of tax and spending cuts we need to stimulate the economy are anathema to the Labour Party’s core voters (and backbenchers), so there is no point in pretending Healey is going to pull any kind of free market rabbit out of the hat. In fact, Burnham and those closest to him have failed to rule out a variety of tax increases being suggested for October. There is pressure from the wider Left to increase wealth taxes, hike Capital Gains Tax and introduce a banking levy.
After Rachel Reeves’ tax raids of over £40bn in her 2024 Budget and £26bn in the 2025 edition, it should be inconceivable that the government is coming back for more. Yet all the sights point in that direction.
Despite my saying the government has boxed itself in, none of this is fate. It doesn’t have to be this way. Labour could still choose the harder path, the one which means difficult conversations with the public about the size of the state, the trajectory of public spending, and the realities of policies we can simply not afford. Andy Burnham could choose to reverse his predecessor’s poor choices on employment taxation and free up business to get the economy moving again.
The sad truth is that the path we’re on is a choice – it’s one Labour have chosen, it’s one the Conservatives chose before them, and it’s one that is leading Britain absolutely nowhere good.