We’re just over a week away from the almost inevitable transfer of power from the Conservatives to Labor and it’s still hard to figure out exactly what we can expect from the new government.
However, if there is one thing we can safely assume, it is that taxes will rise above the figure already drawn by the Conservative Party. Hardly anyone believes Sir Keir Starmer when he says he won’t raise taxes beyond what is set out in the manifesto.
The proposed tax increases outlined in detail are too small to make a significant difference and certainly do not reflect existing upward pressures on public spending (rising health and defense spending and the increasing welfare burden of an aging population) or additional commitments that Labor has publicly announced.
In the face of widespread disbelief over his tax promises, Sir Keir has slightly changed his position to ensure that his pledge not to raise taxes now only applies to “working people”.
He also refuses to rule out any tax increase measures that could be implemented but fall outside the scope of his main commitment to keep headline tax rates unchanged.
In fact, there is one rule he ignores, namely the 10 per cent transfer tax on Premier League football clubs; It seems like a rule for making too much money in sports and entertainment, but there is another, more punitive rule for the less glamorous world of ordinary life. trade. But for the rest, their lips are sealed.
The so-called “conspiracy of silence” surrounds increases in capital gains and inheritance tax, and the goal of a meaningful “wealth tax” so dear to the political left.
The Conservatives are right to focus their attention on these possibilities, even though there is almost nothing they can do to reverse their disastrous position in the polls.
People know they will be taxed more, but they are so fed up with the Conservatives that they will vote Labor anyway. Either that, or they naively assume that other people’s taxes will increase, not their own. How stupid can you be?
One of the measures that saw some reaction from the Labor Party was the pension tax cut. In his first Budget in March 2023, Chancellor Jeremy Hunt announced the abolition of the pension lifetime allowance. This was a very welcome reform for anyone serious about saving for retirement.
It is one thing to limit the scope of tax relief on pension contributions, but it is quite another for the Government to also wipe out investment gains from pension funds, as the lifetime limit often does. After more than a decade of steady reductions in the life limit, Hunt’s reform was therefore welcome.
The Labor Party was everywhere opposed to this concession.
Shadow chancellor Rachel Reeves was initially having none of it.
“Labour will reverse changes to tax-free pensions,” he said. “It is the wrong priority at the wrong time for the wrong people.” It is estimated that returning to the previous position would be worth around £800 million a year to the Exchequer.
There has been a serious reversal since then, as Labor faced an explosion of middle-class anger that would damage its lead in the polls.
Labour’s recent briefing said we don’t have to do this to comply with our fiscal rules and, according to some reports, in fact we won’t.
Retirement is targeted
We’ll see, but there are actually much larger sums to be gained by eating the pension cake – for example, further limiting the tax-free lump sum that can be obtained from the pension fund, limiting the amount that can be made. An inheritance can be left exempt from inheritance tax or by limiting the deduction to the basic income tax rate.
None of this has been ignored when promising to bring “stability” to the retirement savings framework. The new government will find a way to restrict at least some of these tax breaks, from one penny to one pound.
Do not get me wrong. There is certainly a debate to be had about whether pension tax relief is a fair way to encourage savings. The biggest beneficiaries tend to be relatively high earners, who are still likely to save, regardless of whether they are encouraged to do so.
Still, Reeves would be making a grave mistake if he sees Britain’s savings pool as a treasure to be plundered. One of Britain’s greatest structural weaknesses is that it saves too little; Viewing the things we save as just another source of taxation is, as Labor repeatedly says, the wrong approach for any government aiming for reasonable and sustainable levels of growth.
In terms of the amount we save as a share of disposable income, we rank near the bottom of the OECD rankings, alongside economic stars like Greece, Portugal and Mexico.
Britain’s poor savings rate does not fully explain the equally abysmal rate of investment in the productive economy; The United States has a similarly weak savings rate and yet is widely considered a model economy when it comes to growth.
Still, this is a glaring omission and at least helps explain Britain’s embarrassingly low levels of productivity growth. Without adequate savings, it is difficult to have reasonable levels of investment.
double the weakness
In Aesop’s fable of the ant and the grasshopper, the grasshopper spends the long summer months partying and dancing, while the ant builds stores for the winter. When winter comes, the grasshopper begs the ant for food, but the ant refuses and asks why the grasshopper’s hard work should benefit him. The grasshopper starves and cannot survive the winter.
The British economy is that grasshopper. He lives with his past and cannot make the necessary preparations for the future. By threatening to further reduce savings incentives, Labor is doubling down on this ongoing weakness at the heart of Britain’s productivity problem.
Politicians find it difficult to face reality, especially at election time, when promises that the Earth has a much better chance of winning you votes than dire warnings of forced austerity.
Rebalancing the economy away from current consumption and towards investment should be a key policy priority, but there is little evidence of such ambition in Labour’s proposal.
One thing is certain: You don’t start by further discouraging what the economy needs most: much more saving.