Victoria Stratford is a student at the University of Essex, due to graduate in 2025.
Since the Labour Party was elected into government in July, series of economic policies have been announced. Despite promising not to raise taxes in their manifesto, they have created a fiscal plan which requires raising tax revenue by over £8.5bn a year by the end of their parliament. The underlying question remains who will be affected the most by these tax raises?
Rachel Reeves has tried to recast the party as a party of growth to make things easier for working people. But despite Labour continuing to commit to not raising National Insurance, Income Tax and VAT, they are yet to mention what the Government’s actual plan is for raising the revenue it says it needs; saying only that it will be revealed in the Budget on 30 October.
Whilst Labour frames an increase in taxes as a solution to inequality and a way to fund public transport, it also discourages top earners from increasing their productivity in order to minimise their tax liability (this is particularly relevant for high-net-worth individuals).
Tax is not simply a question of raising the rate and watching the money flow in: increasing taxes can, if done unwisely, actually result in financial burdens all round. Decreasing people’s disposable income exacerbates the cost-of-living crisis, reduces consumer spending in the wider economy, and can thus, on net, suppressive actual tax revenues.
Businesses may also be less inclined to invest in the UK compared with other countries with more favourable taxation policies, especially multinationals which can choose where they operate.
Such capital flight would have seriously consequences for both the Exchequer and employment, as well as a wide range of potential knock-on effects on things such as wages, productivity, and innovation. This is the exact opposite of the climate Reeves’ ought to be fostering if her goal is reviving economic growth.
Labour has repeatedly refused to out-rule certain tax rises including increasing capital gains tax, targeting pensions tax relief, reducing IHT, cutting agricultural and business property relief, revaluing council tax bands, and raising fuel duty. Many of these would affect millions of voters; others target small and mobile groups which will adapt rather than pay.
That’s assuming there are no legal hurdles, as there may be to Sir Keir Starmer’s plans to crack down on private schools by charging VAT on fees and, potentially, scrapping their business rates exemption. There could be some legal challenges to these proposals, due to potentially breaching Article 2 (right to education), Article 14 (prohibition of discrimination), and Article 1 (protection of property) of the European Convention on Human Rights (ECHR).
By introducing VAT on independent school fees, hard working parents could be forced to remove their children from their schools into state school, adding more pressure on to local authorities and the state school that are already under immense pressure. This would impact not just the children having to leave their independent schools but also the children in state schools who will now have bigger class sizes and less support from their teachers.
Rachel Reeves has said that she wants to be a chancellor who makes “fair and right decisions”. As we edge nearer to the autumn budget on the 30 October, many fear that the UK could be driven by a range of measures based on left-wing ideology that will negatively impact economic growth.
After all, Labour has a history of ideological policymaking, which has often ended up compounding the UK’s economic challenges.
Whilst Labour’s tax rises are intended to generate revenue for the public services, even with an increase in revenue there is no guarantee that any improvements will materialise – especially if the increased funding is simply ploughed into pay settlements with no string attached.
And if the Government raises taxes, it must be prepared for the inevitable risk of capital flight, which could erode the tax base and leave them with less tax revenue than they expected; likewise, higher taxes on well-advised and savvy targets, such as IHT and Capital Gains, are more likely to produce adaptations in behaviour than big new yields.
If economic activity slows down, leading to the tax revenue to fall due to lower consumer spending, that would mean reduced business profits and, potentially, higher unemployment and even less tax revenue – all making the Government’s life even more difficult.
Labour’s proposed tax increases are driven by a desire to fund public services and reduce inequality. But public spending requires a strong underlying economy to sustain it, and there is a clear danger that trying to squeeze even more blood from this stone may only end up proving counter-productive as highly-mobile individuals and businesses take their business to other, more attractive tax jurisdictions.
