Older readers may remember US Presidential nominee George H W Bush saying those words at the 1988 Republican National Convention. Of course, this pledge was then broken, playing a large part in Bush’s defeat by Bill Clinton four years later.
Labour’s Rachel Reeves may just have made the same mistake with her promise that ‘there are no additional tax rises needed beyond the ones that I’ve set out’.
At face value, then, she would stop at the increases already announced, which include extending the ‘windfall tax’ on energy companies, imposing VAT on private school fees, a further tightening of non-dom tax, and the pledge to close the ‘carried interest loophole’ on private equity bonuses.
Moreover, Labour has ruled out any increases to the rates of personal income tax, national insurance, VAT, and corporation tax – or any new form of ‘wealth tax’. Reeves has also promised to publish a ‘business tax roadmap’ covering the whole term of the parliament within the first six months of taking power.
Needless to say, there are many other ways to raise taxes, including by ‘stealth’, and some can be spun as not hitting ‘working people’ directly. But by putting so much emphasis on the rise in the overall tax burden under the Conservatives, it will be much more difficult for Labour to do anything that would increase it further.
This is a hostage to fortune. For a start, many economic commentators (though not this one) believe that taxes will inevitably have to rise after the election – whoever wins. This is because the current fiscal plans assume years of spending restraint (including large cuts in ‘unprotected’ budgets) which few think are realistic given the growing demands on public services.
These challenges are likely to be even greater for a Labour government – for two main reasons.
First, Labour will be under more pressure to increase spending from its core supporters, not least the trade unions. Some of the Conservatives’ claims about the ‘£38bn black hole’ in Labour’s plans may need to be taken with a pinch of salt. But there can be little doubt about where the risks lie.
Second, Reeves has (deliberately) reduced her own room for manoeuvre by doubling down on the current fiscal framework. She committed in her Mais Lecture to a tougher fiscal rule of balancing the current budget, so that day-to-day spending is always covered by revenues. She also plans to strengthen the oversight of the Office for Budget Responsibility (OBR), including a pledge to keep the new rules unless the OBR declares the UK is in economic crisis.
Even many critics of the Truss/Kwarteng ‘mini-Budget’ feel uneasy that so much power is being handed to technocrats, and worry that the pendulum may have swung too far. In particular, the new requirement to balance the current budget (depending on how this is defined) could make it harder to make an immediate injection of cash into public services without raising taxes too.
How much does this matter? Some will say that no one takes campaign commitments too seriously. The Conservatives broke their own 2019 manifesto commitment not to raise National Insurance in 2022, citing the need to fund the NHS and social care, before this increase was cancelled by Liz Truss. Indeed, some opinion polls suggest that voters would be happy to pay more tax – or at least for others to do so – if this paid for better public services..
Reeves could also play the card which reads ‘the public finances are in a worse state than I thought’. The fiscal timetable could help here. The Shadow Chancellor has ruled out an emergency Budget straight after the election and will wait (sensibly) until the completion of a comprehensive spending review in the autumn.
A stronger economy would obviously be better, but some bad news on growth, inflation or interest rates in the meantime could actually make it easier for an incoming Labour government to say that the facts have changed, and taxes need to go up after all – while still blaming the Conservatives.
However, while that might limit some of the political fallout, it cannot mitigate the economic damage from further increases in what is already a record tax burden. Breaking a campaign promise so early would not be great for the new government’s credibility with businesses or investors either.
Labour will be hoping that something bails them out. They may be lucky. I do not believe it is inevitable that taxes will have to rise after the election, regardless of who wins, because there is plenty of scope for surprise growth and for productivity-led savings in public spending.
The Opposition’s ‘plan for growth’ does include some sensible proposals that would not cost a lot of money, notably planning reform. But it also includes a raft of others that will dampen growth, including clunky interventions in the labour market and the umpteenth iteration of a failed ‘industrial strategy’.
With the economic recovery already gaining momentum under the Conservatives, a change of tack under Rachel Reeves would be more likely to derail growth, making Labour’s tax headache even more painful.
This piece was first published by CapX on 29 May 2024
Plain-speaking Economics 