by With little more than a week to go before the almost inevitable transfer of power from the Conservatives to Labour, it is still difficult to know exactly what to expect from the new government.
One thing we can safely assume, however, is that taxes will rise on top of what the Tories have already put in. Almost no one believes Sir Keir Starmer when he says he will not raise taxes beyond what is in the manifesto.
The proposed tax increases detailed are too small to make a significant difference, and will certainly not offset the existing pressure on public spending – increased health and defense spending and the welfare burden on a growing population which is aging – or additional commitments that Labor has publicly specified.
In the face of widespread disbelief over his tax promises, Sir Keir has changed his position a bit more so that the promise not to raise taxes now only applies to “working people”, whatever that means.
He also refuses to rule out any number of tax-raising measures that could be implemented but fall outside the scope of his main pledge to keep the main rates of taxation unchanged.
In fact, there is one he has ruled out, namely the 10pc transfer tax on Premier League football clubs – one rule, it seems, for big money-making in sports and entertainment, but another more punitive one. for the usually less glamorous life. commerce. But on the rest, his lips are sealed.
A so-called “conspiracy of silence” involves increases in capital gains and inheritance tax, and that much-cherished goal on the political left of a meaningful “wealth tax”.
The Tories are right to draw attention to these possibilities, even if there is nothing they can seem to do to reverse their disastrous position in the polls.
People know they will be taxed more, but they are so fed up with the Tories that they are going to vote Labor anyway. Either that or they naively assume that other people’s taxes will go up, but not their own. How stupid can you get?
One measure where Labor has shown a bit of an ankle is pension tax relief. In his first Budget, in March 2023, Chancellor Jeremy Hunt announced that the pension lifetime allowance would be abolished. For anyone serious about saving for a pension this was a very welcome reform.
It is one thing to limit the amount of tax relief on pension contributions, but quite another for the Government to also reduce the investment gain on pension pots, as the lifetime limit has often done. After more than a decade of steady reductions in the life limit, Hunt’s reforms were therefore welcomed.
In opposing this concession, Labor is all over the place.
Rachel Reeves, the shadow chancellor, was having none of it at first.
“Labour will reverse the changes to tax-free pension allowances”, she said. “It’s the wrong priority at the wrong time for the wrong people”. It is estimated that it would be worth around £800m a year for the Exchequer to return to the previous situation.
Faced with an outpouring of middle-class fury that threatened to overturn Labour’s poll leadership, it has since taken an alarming turn.
We don’t need to do this to stay within our fiscal rules, Labor recently briefed, and indeed, according to some reports, we won’t.
Focusing on pensions
We will see, but in reality there is much more money to be gained by eating into the pension cake – for example by further limiting the tax-free lump sum that can be taken out of a pension pot, by limiting the amount that can be . be bequeathed free of inheritance tax, or by restricting the relief to the basic rate of income tax.
In pledging to introduce “stability” into the pension savings framework, none of these things have been ruled out. A penny to a pound, the new government will find some way to limit at least some of the tax breaks.
Don’t get me wrong. There is certainly an argument to be made about whether pension tax relief is a fair way to encourage saving. The people who benefit the most are usually relatively high earners and are likely to save anyway whether they are encouraged to do so.
Likewise, Reeves would be making a serious mistake if she viewed Britain’s savings pool as a treasure trove to raid. One of Britain’s biggest structural weaknesses is that it saves too little; the wrong approach for any government aiming to achieve reasonable and sustainable levels of growth, as Labor always says, is to see what we do as nothing but another source of tax.
In terms of what we save as a proportion of disposable income, we are down there at the bottom of the OECD league table, alongside economic luminaries such as Greece, Portugal and Mexico.
Britain’s poor savings rate does not fully explain its investment rate in the productive economy, the US has a similarly poor savings rate and yet is widely regarded as a model economy when it comes to growth.
Equally, it is a clear omission, and goes at least some way to explaining Britain’s embarrassingly low levels of productivity growth. It is difficult to have reasonable levels of investment without reasonable levels of savings.
Double down on weakness
In Aesop’s fable about the ant and the wren, the grasshopper spends the long summer months partying and dancing while the ant is building stores for the winter. When winter comes, the grasshopper asks the ant for food, but the ant refuses and asks why the grasshopper should benefit from his hard work. The wren is hungry and does not survive the winter.
That wren is the British economy. It dwells on the past and does not properly provide for the future. By threatening to further reduce the incentives to save, Labor perpetuates this ongoing weakness which is at the heart of Britain’s productivity problem.
Politicians find it hard to face the truth, especially at election time when promising the Earth is far more likely to win you votes than warning that belt tightening is in the offing.
Rebalancing the economy away from current consumption towards investment should be a major policy priority, but there is little evidence of that ambition in Labour’s bid.
One thing is certain: you don’t start by further disincentivizing what the economy needs most, which is much more savings.
