Tax rises must not sacrifice growth
3 min read
There has been much speculation about Rachel Reeves’ Budget. The new government is attempting to land its £22bn black hole narrative and “fix the foundations”, while maintaining some pretence of not increasing taxes on working people – a cohort few ministers are keen to define.
The key to securing credibility for tax rises and more borrowing rests on whether the Chancellor can convince the nation that there truly is a ‘black hole’, not of her making.
Labour has argued that public sector pay rises were not funded in the last government’s plans. But, of course, whoever won the election would have had to deal with a scheduled spending review due at the end of the year, with decisions left to be taken about how to make the numbers add up and address those spending pressures.
There has been worryingly little emphasis on driving up productivity
Last summer when I was chief secretary, we settled pay disputes for the year with teachers, nurses and other workforces by making departments wash their faces, without relying on further tax increases or borrowing.
The early signs from settlements made with trade unions and workforces indicate that the new Chancellor is seeking a reset, hoping to avoid further strikes while discouraging workforces to seek higher rises this coming year.
There has been worryingly little emphasis on driving up productivity or putting conditions on pay deals. A hostage to fortune or a way of avoiding strikes in the immediate term? Time will tell.
The Chancellor has signalled a new fiscal rule on debt to raise money for public investment, despite ruling this out in the months leading up to the election.
Markets and commentators will be examining what “guardrails” – her term – would bring credibility to such a U-turn, but many will suspect this is an excuse for blowing a lot of extra spending that will not deliver the necessary growth.
It will be a challenge to ease the concerns of the markets on even higher levels of borrowing under these new rules, alongside new, additional investment capital that generate a positive return on investment and improvement in productivity.
The main anxiety for the public will be which taxes rise, by how much, and the impact on growth. It is one thing to make the numbers add up, but quite another to depress the motivation to work and invest, undermining the prospect of a growing economy.
Persistent non-denials over increasing the rate of employers’ National Insurance, changes to Capital Gains Tax and around inheritance tax rules as well as those governing agricultural property relief dominate pre-Budget coverage.
There have been mooted cuts to the tax-free lump sum people can access from their pension pots, and rumours of a flat rate of tax relief on pensions savings.
Any tax changes will have political implications, but the key will be whether the combination can give the new government a shot at maintaining the record growth we saw in the first half of 2024.
John Glen, Conservative MP for Salisbury and South Wiltshire and former chief secretary to the Treasury
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