Rishi Sunak's readiness to raise taxes for the rich could cause problems for Labour

Chaminda Jayanetti
·5-min read

A month before Christmas, some are about to get the opposite of good cheer. For all the spin and chicanery that will doubtless surround Rishi Sunak’s spending review tomorrow, we can expect a straitjacket for most public services and staff, briefly obscured by some Santa Claus cosplay by way of small funding boosts for police, schools and hospitals. But much of the meat must wait for next year’s budget.

It seems that tax rises are coming in the new year. We don’t yet know what form they will take, but given the Tories’ repeated pledge not to raise VAT, income tax or national insurance, they appear likely to hit the better off. Most of the discussion of this has focused on internal Tory opposition – though realistically, Conservative MPs are not going to vote down their own government’s budget.

But few seem to realise that Rishi Sunak’s readiness to increase taxes for the rich could cause problems for Labour. It’s not simply a matter of that tired old trope of shooting the opposition’s fox. Labour’s spending plans from the 2017 and 2019 manifestos are based on taxing higher earners and corporations to fund significant public spending. We could now see some of those proposed tax rises adopted by Sunak. But instead of funding higher spending, the chancellor would use those tax rises to reduce the deficit.

Needless to say, he won’t adopt all of them, nor anywhere near most of them. The big headline income tax hit on those earning more than £80k per year is not going to happen on the Tories’ watch. But equalising capital gains tax rates with those of income tax will raise billions with virtually no backlash from voters. There’s also talk of corporation tax – slashed since 2010 – rising back to 24%, just shy of the 26% proposed in the Labour manifesto.

Corporation tax rises accounted for more than a quarter of the increased spending Labour proposed, with an attributed value of nearly £24bn a year by 2023-24. It may just be kite-flying for Sunak to hint at going anywhere near those levels. But if he does, and he earmarks the revenue for deficit reduction, that’s a hefty chunk of Keir Starmer’s revenue raisers already spoken for.

This would pose a problem for Labour – some of the electorally “easy” tax rises from its previous manifestos will have been used up, but without necessarily providing the extra public spending that Labour wants.

So how would Labour fund its spending plans – the ones Starmer largely committed to keep during his leadership bid? He will either need to find other, electorally risky tax rises; scale back deficit reduction and hope voters are more forgiving than they were under Ed Miliband; or cut back the spending plans and risk significant internal revolt, without the Blair-era polling leads that render revolt irrelevant.

Labour could propose a grand new tax reform, such as a land value tax, but these can have nasty electoral side-effects – the Tories’ “garden tax” jibe nearly derailed Labour’s 2017 election campaign, such that the then shadow chancellor, John McDonnell, heavily scaled back the plans afterwards.

Or there’s every wonk’s favourite magic bullet, devolution. All the signs are that Labour is gearing up for a significant offer on this. If that involves devolving more tax-setting powers – “fiscal devolution” – it could make passing the buck look like handing back control. And there is both anecdotal and polling evidence that voters around the country are increasingly keen to take back control from Westminster.

But there’s a problem here as well. The more you devolve, the less you can do – and the less you can promise. Take housebuilding. How can Labour pledge to build a certain number of houses each year if it leaves those decisions to local or regional government? Perhaps devolution is the right approach, but it’s a process, not an outcome. An election campaign that ends up talking about processes rather than outcomes is a campaign that is liable to struggle.

Of course, perhaps by the next election voters will be desperate to be free of Westminster and Whitehall’s collective yoke. But if Sunak opens the floodgates on infrastructure spending around England – again stealing Labour policies – that could dampen voters’ desire for devolution, at least in the short term.

At the moment Labour’s frontbench is frustratingly sphinx-like on its tax and spending plans. There’s evidence that nothing has changed, and there’s evidence that a big lurch to the right is on the way – there’s evidence for everything and nothing, because there is nothing of substance at all. And frustrating though that is, it’s not the end of the world. The next general election is years away. Starmer and his team are comfortable taking their time to unveil policies, when it’s the party’s brand that is in most urgent need of repair.

Perhaps none of this will come to pass. The Tories may revert to type and unleash austerity 2.0 when austerity 1.0 had never even ended. Public appetite for more years of miserly misery, especially coming out of the constraints of living with Covid-19, will surely be less than in 2010. Squeezed council and care funding and a public-sector pay freeze make it easier for Labour to outflank the Tories with a transformative offer on the pay of care workers – including many working-class women in Labour’s target seats.

Nevertheless, the Tories have long since established that their every stated principle can be dropped like a rock if there are short-term votes in doing so. Jeremy Corbyn’s manifestos had certain things going for them – Labour’s problem will be if Sunak goes for them first.

  • Chaminda Jayanetti is a journalist who covers politics and public services