Labour plotting ‘eye-watering tax increases’ as Tories warn £30bn plans will cripple incomes

Sir Keir Starmer and Rachel Reeves - Eddie Mulholland for The Telegraph
Sir Keir Starmer and Rachel Reeves - Eddie Mulholland for The Telegraph

Labour has been accused of plotting “eye-watering” tax rises on middle and high earners after analysis showed the party has made more than £90 billion of spending promises.

Pledges made by Sir Keir Starmer and Rachel Reeves, the shadow chancellor, would amount to an extra £2,138 per household if all of them were paid for through general taxation.

It comes despite Ms Reeves describing the Conservatives as “the party of high taxation” when she set out her economic policy in a speech earlier this week.

She has made it clear that Labour would impose a raft of new wealth taxes if the party won an election, targeting property, shares, capital gains, higher earnings and private schools.

Respected economists have suggested any government will have to “increase taxes just to stand still” in the coming years. It means that the tax burden under Labour would potentially rocket to pay for all of the Labour leader’s plans.

The proposals for extra spending or reversing government policies since Sir Keir came to office amount to £94 billion per year. However, the tax rises and savings Labour has so far identified add up to just £34 billion, leaving a potential £60 billion funding gap.

The plans include a £28 billion per year green investment deal, scrapping business rates at a cost of £25 billion per year, and reversing Tory spending cuts that would add another £27 billion to public spending.

Labour says it will fund some of its commitments, such as its huge green deal, through extra borrowing and economic growth. However, Ms Reeves has made clear that she and Sir Keir would shift the tax burden onto those they consider wealthy.

Pledging to look again at the Government’s proposed 1.25 per cent increase in National Insurance to fund an extra £12 billion for health and social care, she said this week: “It’s not right that the only people who are being asked to contribute to the health and social care levy are those people who go out and work every day and the people who employ them.

“If you get your income from stocks and shares and dividends, or a portfolio of buy to let properties you pay no additional tax whatsoever in this health and social care levy. That cannot be right.”

In addition, Labour has opposed the end of the £20 Universal Credit uplift, the freeze on income tax personal allowance, the public sector pay freeze, the suspension of the pensions triple lock, and the removal of the international aid budget, which would require another £25.2 billion in taxes.

One-off spending commitments include an extra £13.6 billion for schools to catch up after Covid and £377 million for apprenticeships.

How Labour will pay for everything is unclear. In the past, Ms Reeves and Sir Keir have between them backed increases to inheritance tax; a new lifetime gift tax; cutting the annual capital gains allowance and introducing a 50p income tax band for earnings over £125,000.

Paul Johnson, the director of the independent Institute for Fiscal Studies, said: “When people talk about higher tax on higher incomes, they don’t tend to take into account the fact that the last decade has already seen big tax increases on people on high incomes.

“The fact that the threshold at which you start to pay higher rates of income tax has not gone up means that more and more people have been dragged into the higher tax bands, and huge cuts in pension tax relief have people at the top.

“When you look at other countries that have significantly higher tax burdens, none of them do that just by taxing the rich.”

Tax burden very likely to increase

Social care elderly - Gary John Norman/Images Source
Social care elderly - Gary John Norman/Images Source

Boris Johnson said he would “lay quite a lot of money” on the tax burden increasing over the next decade regardless of who is in power.

He said: “There will have to be even more funding for health. Social care reforms still haven’t been funded at all. There will be pressure for pay rises across the public sector and they are going to lose petrol duty when electric cars become the norm.

“Either party will have to raise taxes just to stand still, so clearly Labour will have to decide which of these policies make it into their manifesto.”

Torsten Bell, the chief executive of the Resolution Foundation think tank, said: “I suspect they will go into an election talking about fair taxes rather than additional taxes,” adding that “they’ve got a decision to make on whether it’s income tax or capital gains tax” that produces extra money for the Exchequer.

Blairite warns raising taxes ‘would stifle growth’

It came as a leading Blairite warned Sir Keir that raising taxes would be a major error that would stifle economic growth.

Ruth Kelly, the former education secretary and Treasury economic secretary under Sir Tony Blair, also urged the current Labour leader to reduce the size of the state to save money and devolve more powers locally including giving councils the ability to raise business taxes.

Writing for The Telegraph below, Ms Kelly, who has joined the Conservative-leaning think tank Policy Exchange, said: “With the tax burden already high, Labour will not be able to strengthen services through further tax rises, as they will only serve to constrain growth.”

A Conservative Party spokesman said that Labour had “committed to spending more than £300 billion over the next three years without explaining where that money would come from”.

They added: “The hard truth is that it would have to come from eye-watering tax rises on the British people, crippling incomes and stunting growth.”

A Labour Party source said: “Every policy Labour has released has been fully costed, in line with our fiscal rules. With our Office for Value for Money and our fiscal rules, Labour will ensure that every pound of taxpayer money is treated with the respect it deserves.”

It’s not just about spending more; this country needs every pound to be allocated with purpose

By Ruth Kelly, the secretary of state for education 2004-06

“It’s the economy stupid!” The phrase belongs to James Carville, a strategist for Bill Clinton’s successful 1992 presidential bid, and became the rallying cry for the Clinton campaign. It succinctly summed up the fact that voters will always care deeply about their family finances, the price of goods and services, the state of the job market and the burden of taxation.

Thirty years later and a continent apart, our government would be wise to reflect on those words.

Ruth Kelly, pictured in 2020 - Andrew Crowley for The Telegraph
Ruth Kelly, pictured in 2020 - Andrew Crowley for The Telegraph

There are colossal economic challenges ahead. The facts are stark: soaring energy costs, rising inflation and impending tax rises are about to hit UK households, with the tax burden forecast to rise to the highest level since 1949 over the next five years.

State spending was over 50 per cent of GDP last year. Some economists are predicting cuts to real incomes greater than those during the financial crisis.

As a former Labour MP for Bolton West – a Tory marginal situated among the “Red Wall” seats of Bury North, Bury South, Bolton North East and Leigh – I cannot envisage a situation in which the voters of Bolton West or any of its neighbours choose to vote at the next election for a larger state and even higher taxes.

They weren’t going to choose a [Jeremy] Corbyn and [John] McDonnell spending plan then, and they wouldn’t now. When I first stood for election, on the doorsteps teachers told me about placing buckets under leaking classroom roofs; patients told me of waiting interminable hours on trolleys in NHS hospitals; countless households had no one in work – and had not had for many years.

The state could not be the answer

While I was adamant then that the state had a role to play in funding public services properly, I knew the state could not be the full answer. In one newspaper article written shortly before the election, I asked how anyone could argue that “the remedy… is further direct taxation, when the people of this country have already seen the biggest tax rise in peacetime history?”

Ever more taxation cannot be the solution to better public services. This is the progressive answer too. With the tax burden already high, Labour will not be able to strengthen services through further tax rises, as they will only serve to constrain growth.

As education secretary, I argued that the state should no longer be primarily a direct provider of services, but instead become a regulator and commissioner of services provided by the public, private and voluntary sectors. It wasn’t simply about spending more and more money – every new pound had a purpose.

That is why – at a moment of crisis in our public finances and with huge economic challenges ahead – I have chosen to join Policy Exchange, one of the UK’s most influential voices.

We will be arguing for an enabling state – one that allows civil society to grow, in which the dignity of all is respected and their potential allowed to develop, but which is not afraid of using fiscal flexibility, where we have it, to smooth the path and shield the most vulnerable.

One that funds essential public services well, but only in return for reforms. One that is avowedly pro-business and pro-growth, recognising this as the only way we can tackle the cost-of-living crisis. One that when tackling the climate crisis, ensures every penny is spent wisely, taking care not to impose undue burdens on working families.

Desperate times call for a reform agenda

Ruth Kelly, in 2005, with John Prescott, and Sir Tony Blair - Paul Grover for The Telegraph
Ruth Kelly, in 2005, with John Prescott, and Sir Tony Blair - Paul Grover for The Telegraph

A reform agenda is now desperately needed. The UK has been bedevilled since the financial crisis with woeful levels of productivity growth, the second slowest in the G7. Just last month, an important OECD report projected that over the next 40 years the UK would perform near the back of the pack in per capita GDP growth.

As Andy Haldane, the former chief economist at the Bank of England, pointed out in a Policy Exchange seminar last year, while the United Kingdom has some of the most successful companies in the world, it also has a longer and wider tail of underperformance, a fact which largely explains these international differences. We must spread productivity and innovation better across companies and places.

The recent discourse of “levelling up” has merit, but only if it is more than a central government exercise. It needs to be an agenda driven from the bottom up rather than the top-down. We need to see real devolution of power, not just decentralisation of Government activity and relocation of Government jobs to the regions.

Only local collaboration and leadership can actually deliver the sustainable and long-term growth that this country needs. For example, we should seriously consider amalgamating local funding pots and devolve some taxes, such as business rates, so that local communities have the resources and flexibility they need. We already have mayors firing on all cylinders, why not give them some real firepower?

Our economic challenges are great, but the United Kingdom has the tools and the talent to turn them into opportunities, so long as we have the courage to seize them.