Rachel Reeves walks UK tax tightrope

When Rachel Reeves stated on Tuesday that she did not think there was a necessary reason for any "added tax hikes," it may have sounded like a promise that there would be no tax increases in the United Kingdom if the Labour party was in power.

However, it is common during a national election race for the shadow chancellor's statements to be less clear than they appear.

Several top economists and research organizations have stated that whoever becomes the new leader on July 4 will confront a severe financial constraint and be compelled to make significant reductions in government expenditures, increase taxes, or take on additional borrowing.

The stance of the Labour party is that they have already excluded the possibility of raising key taxes such as income tax, national insurance, capital gains tax, corporation tax, and wealth taxes.

In regards to the possibility of increasing taxes, the leading opposing political party has come up with a more complex promise that was put to the test by their leader, Sir Keir Starmer, on Monday. He stated to the BBC that they have carefully considered all their proposals and determined that no tax hikes will be necessary.

On Tuesday, Reeves was questioned about the possibility of the following government having to increase taxes to address the declining state of public services in Britain. In response, Reeves stated that she does not believe any further tax hikes are necessary in addition to the ones already proposed.

During her visit to a Rolls-Royce factory, she explained to journalists that the Labour Party has no plans to implement any additional tax hikes beyond the ones they have already proposed. These measures consist of extending the windfall tax on energy companies' profits until 2029, introducing VAT on private school tuition fees, and ensuring that private equity bonuses are subject to "fair taxation".

On Tuesday, Reeves seemed to have taken a stronger stance than Starmer by rejecting any possibility of increasing taxes. However, representatives from the Labour party clarified that her statement was only related to their manifesto, which aligns with what Starmer had said on Monday. It is not clear what will happen after July 4.

One individual stated that there are no intentions to implement more taxes besides the ones already mentioned. They clarified that the political manifesto does not include any plans for additional tax hikes, and they have no plans to include any.

Using different phrasing, a future Starmer government might still determine that certain taxes require an increase. Nonetheless, this decision could lack public support due to an abundant number of individuals already grappling with the financial burdens of everyday life.

For many years, politicians on both sides of the Atlantic have been troubled by George H.W. Bush's statement to voters during his candidacy for the US presidency in 1988. He adamantly declared, "read my lips: no new taxes," and this statement became a defining moment in his campaign. However, Bush later reneged on his promise and implemented new taxes, causing public outrage and disappointment.

Even if six of the largest UK taxes are protected from being raised, a newly appointed chancellor still has several other options to increase government revenue. Labour has not ruled out the possibility of increasing VAT, which currently accounts for 15% of government income and is the biggest tax that could potentially be raised.

Instead of raising income taxes, a Labour party administration may consider increasing existing property taxes like stamp duty or looking into the levies on pensions instead. However, this might result in resistance from elderly voters who tend to have a higher voter turnout compared to younger generations.

There are many taxes that may be imposed such as those related to betting, gaming, environmental factors, fuel consumption and the sale of tobacco and alcohol that exist beyond our current understanding.

During her speech at the party conference in 2021, Reeves stated that she would evaluate each tax exemption in the UK; however, she has scarcely spoken about it thereafter.

At present, it's not surprising that only a few politicians are willing to openly discuss the possibility of increasing taxes. This is due to the fact that the tax burden in Britain is expected to climb to 37.1% of the GDP by 2028-29, which is four percentage points higher than prior to the coronavirus outbreak.

According to Carl Emmerson, who holds the position of deputy director at the Institute for Fiscal Studies, when new governments, be it the Labour party or the Conservative party, come into power or regain power, they tend to implement tax increases.

According to him, based on past events, it wouldn't be unusual to hear news of substantial tax increases the year after elections. He highlighted the announcements made after the elections of 1992, 1997, and 2010, among various others, as examples.

The current Conservative government has planned to implement years of financial control measures following the election. This means that non-protected Whitehall departments, like transport, local government, and justice, could expect yearly reductions to their budgets ranging from 1.9% to 3.5%, after factoring in inflation, according to the IFS.

Due to the difficult financial situation, a lot of economic experts predict that the Labour party might opt for increasing taxes instead of implementing severe budget reductions.

Other economic experts, including the IMF, agree that the upcoming British government will have to tackle a significant financial restoration project that could amount to billions of pounds. However, there is limited opportunity to accomplish this by drastically reducing public expenditure.

The IMF recently assessed the UK in its Article IV report and found that the Conservatives' 4p slash in national insurance, which Labour did not oppose, was not a smart decision. The IMF also cautioned that the UK must make some difficult choices to address a £30bn shortfall in its public finances.

Jens Larsen, who works as an economist for consulting firm Eurasia Group, expressed uncertainty about Labour's plan to steer clear of increasing tax rates. He believes that political strategy may suggest taking action sooner rather than later.

He said that if they wish to place responsibility for hard choices on their predecessors, they must do so at an early stage.