Rachel Reeves, the Chancellor of the Exchequer, is preparing for a challenging second budget set for November 26, 2023. This budget must convey a strong narrative of fairness to justify anticipated tax increases, a task made more difficult by the economic realities facing the UK. Reeves’s recent speech at the Labour Party conference received enthusiastic applause, where she emphasized the importance of investment over austerity and positioned Labour as the true representative of workers’ interests.
Despite the positive reception, her address lacked clarity on how Labour plans to address tax increases and the principles guiding these decisions. The looming necessity of potentially raising over £20 billion in taxes arises from the Office for Budget Responsibility’s recent reassessment of the UK’s productivity potential, which suggests the economy still struggles to recover from years of Conservative austerity. Reeves’s initial step is to communicate this complex situation effectively to the public.
Addressing Taxation Fairness
The absence of a cohesive narrative regarding tax increases risks undermining the budget’s acceptance. The previous winter fuel cut decision lacked a clear rationale, and without a compelling story behind tax rises, public support may falter. Some within Labour have hinted at a shift towards radical tax reform, but this requires a clear identification of the current system’s flaws and the groups benefiting unfairly.
In a recent article for the Financial Times, Helen Miller, director of the Institute for Fiscal Studies, urged Reeves to adopt a broader vision rather than focusing solely on isolated tax increases. She pointed out that the existing tax system is riddled with inequities, where individuals with similar incomes face vastly different tax liabilities. Reforms could address these disparities, particularly the tax bias against employees, as highlighted by the Resolution Foundation.
Research conducted by the think tank Demos explored public support for progressive tax changes recommended by the Centre for Analysis of Taxation (CenTax). These changes include applying national insurance contributions on rental income, potentially raising £3 billion, and reforming capital gains tax to align rates with income tax while introducing investment allowances. Demos’s polling indicated that the public is more supportive of these reforms than of significant increases in income tax or national insurance contributions.
Navigating Political Landscape
When participants were presented with a hypothetical news story describing the Chancellor proposing “nine large tax rises” to “slash loopholes and rebalance the tax system,” positive responses outnumbered negative ones by 10 percentage points. Individual proposals, such as additional council tax on homes valued over £2 million and applying equivalent employer national insurance contributions on partners in law and accountancy firms, also garnered favorable reactions. In contrast, raising the basic rate of income tax faced significant opposition, with objectors outnumbering supporters by 35 percentage points.
Reeves’s determination to uphold Labour’s manifesto pledges presents a complex challenge. While some within the party advocate for a more flexible approach to taxation, any changes must be presented with a clear narrative to avoid perceptions of desperation from a government facing unpopularity. Treasury insiders suggest that last year’s budget, which raised an additional £8 billion from higher-income individuals, could serve as a guiding framework.
Despite her previous successes, Reeves faces criticism from the left regarding the perceived lack of taxation on the wealthiest. Reform measures proposed by various think tanks not only aim to enhance fairness but could also stimulate economic growth by reducing incentives for tax avoidance through methods like establishing one-person companies.
Ultimately, presenting a budget with £20 billion to £30 billion in additional taxes solely as a means to boost productivity may not resonate well with the public. Instead, Reeves should consider framing her proposals within a context of social justice, solidarity, and fairness, themes that resonate with Labour’s foundational values. She emphasized her belief in “a Britain founded on contribution” during her speech, and with less than eight weeks until the budget, she must justify why certain groups should contribute more to the national finances.
