Last week’s Labour manifesto did not cause anyone to fall off their seat. It had some sensible policies, a few preannounced tax hikes and many vague statements on everything the party hopes to fix if it wins the election on 4 July. This is part of a deliberate strategy to present itself as a party of stability, in contrast to the Conservatives’ erratic track record in recent years. Politically, it makes a lot of sense.
The headline figure is that Labour expects to raise £8.6bn in tax a year, but a good chunk is supposed to come from reducing tax avoidance (not evasion) – moves such as these, which include tightening non-dom rules, are expected to raise £5.2bn. The party has explicitly ruled out increases to income tax, VAT or national insurance, while also committing to debt falling as a share of the economy in the medium term.
However, the inescapable problem is that the next government is going to need money to come from somewhere. As Paul Johnson, director of the influential Institute for Fiscal Studies (IFS) puts it, the Labour manifesto diagnoses “deep-seated problems across child poverty, homelessness, higher education funding, adult social care, local government finances, pensions and much more” and promises a series of “reviews and strategies” to tackle them.
“But delivering genuine change will almost certainly also require putting actual resources on the table. And Labour’s manifesto offers no indication that there is a plan for where the money would come from to finance this,” he adds.
The manifesto talks a lot about stimulating economic growth, and undoubtedly the country needs it. But growth is not the kind of thing that materialises just because there is a change in government. It takes time, thoughtful policies and perhaps a degree of luck.
Unless economic growth miraculously exceeds expectations all by itself, the next government is likely to turn to either higher borrowing, cuts to public services or tax hikes. This is not exactly a cheerful political message, so parties are staying clear of it before the election. But they won’t be able to ignore the problem for much longer after that.
Labour insists it will not raise taxes on working people. The emphasis here is on 'working', which leaves the door open for some form of tax hike on wealth. Capital gains tax (CGT) is an obvious target. It is levied at a lower rate than income tax – if you’re a higher or additional-rate taxpayer, you pay income tax at 40 or 45 per cent on a portion of your income, but are charged 24 per cent on residential property gains and 20 per cent on gains on other assets. That's why private equity partners prefer paying themselves through capital gains (so-called “carried interest”) rather than via income, one “loophole” that Labour promises to close in the manifesto, with the hope of raising £565mn a year.
In their own manifesto, the Lib Dems proposed a CGT reform that would bring rates in line with income tax rates, while also introducing a new “inflation allowance”, so that only real-term gains are taxed. Labour could ultimately decide to do something similar.
The trick to maximising tax revenues from a CGT hike is announcing it as close to implementation as possible, to reduce the number of people who crystallise their gains ahead of the hike. This does not matter to the Lib Dems, who have a negligible chance of winning the election, but it could be important to a potential Labour government. A CGT hike might well be on the cards in Labour’s first fiscal event once elected, or in the following years. The rumours that are already swirling might ultimately reduce this tax take, but that in itself is unlikely to put them off.
