Labour’s Lost Opportunity
Many of Britain’s problems can be explained by the fact that 1% of the population owns more wealth than 70% combined. Despite its break with failed Tory economics, the budget did little to tackle this obscene inequality.
Chancellor Rachel Reeves poses with the red box outside number 11 Downing Street. (Photo by Dan Kitwood/Getty Images)
The backdrop to Rachel Reeves’ budget yesterday is a country riven by vast and growing inequality, rising poverty and falling incomes for most. According to a recent report by Oxfam, the top 1 percent in Britain has more wealth than 70 percent of the population combined. The UK’s wealth gap, a measure of the difference between the country’s poorest and richest, has increased by 50 percent over the past decade.
It is no coincidence that rising inequality in the UK has coincided with rampant profiteering by large corporations, who pay out these higher profits to their shareholders through dividends or buybacks. A report from the IMF estimates that corporate profits accounted for nearly half of inflation in Europe between 2021 and 2023. While profits for large corporations rose above the rate of inflation, wages lagged behind. Higher profits for the largest corporates and billionaire opulence (as can be seen in the booming luxury goods market) have coincided with child poverty in the UK reaching 30 percent (4.3 million). Modelling from the Joseph Rowntree Foundation shows that real incomes for the average family could fall even further, by as much as £770 by 2029.
For all the gestural policies to dress this budget up as ‘those with the broadest shoulders bearing the heaviest burden’, the reality is that the ultra-rich and big corporations have gotten off lightly. The VAT charges on private schools, higher air passenger duty for private jets, and modest increases to rates of capital gains and inheritance tax are all window dressing. There has been no increase in corporation tax, and the increase in much of the cost of higher employer national insurance contributions (NIC) will be passed on to workers in the form of lower wages and higher prices. The bottom line is, while Labour have scraped through a budget with just enough spending to avoid austerity, much of the additional tax needed to pay for it is coming from ‘working people’ — despite the party’s promise.
Wealth or Workers
One of the key announcements in the Chancellors speech is that Labour will maintain the freeze to the income tax threshold, introduced by the previous government, until 2028. Known as ‘fiscal drag’, the frozen tax-free allowance, which is supposed to increase in line with inflation, will bring many more people into higher tax bands than they should be. If the threshold had gone up with last year’s inflation rate of 7.3 percent, everyone earning over £13441 (the inflation-adjusted threshold) would be getting £871.50 back in their annual take-home pay, with anyone earning below that amount paying no income tax at all. Instead, the threshold freeze will cost average workers around £500 extra per year by the end time it ends in 2028. The projected revenue from this policy is £42.9 billion by 2027-28 (around £14.3 billion annually).
Capital gains tax (CGT) is one of the most distortive, inefficient, and unfair taxes in UK legislation. CGT is the tax paid on the value of the increase of an asset once it has been sold. Capital gains are often characterised as ‘unearned income’ because they accrue through the ownership of an asset rather than earned by work. The tax is only really paid by the top 1 percent of the population because they own most of the income-generating assets, but the rates for capital gains tax are still much lower than income tax. This is not only morally questionable but opens the door to loopholes whereby the richest can disguise earned income as capital gains in order to pay a lower rate of tax. Rachel Reeves has increased the basic rate from 10 percent to 18 percent and the higher rate from 20 to 24 percent, which is still the lowest in the G7. This is still well below the higher rate for income tax, meaning the rich still get a substantial ‘tax discount’ on their unearned income. As a result, the tax will only raise only an additional £1.5 billion next year.
If the Chancellor had equalised the rate of capital gains with income tax (destroying the loophole in the process), she could have raised £14 billion a year. There were also changes to inheritance tax for agricultural land, impacting a small number of wealthy farmers, as well as higher stamp duty for second homes aimed at landlords. These modest taxes on the wealthiest add up to a few billion annually at most, a fraction of the extra being paid by working people. In contrast to these light-touch measures, a true tax on the wealthy, targeted at the richest 20,000 people, that charged just 2 percent on assets worth over £10 million could raise £24 billion. Compared to working people, the wealthy have gotten off lightly despite being the ones who have benefitted most from inflated asset prices and soaring profits over recent years.
By far the biggest contributor to the additional £40 billion in tax raised in the budget for the year ahead is the increased rate of employer national insurance contributions and the reduction in its threshold from £9100 to £5000. The change will provide £25 billion a year in additional revenue, directed towards urgent spending needs for the NHS, schools and a small amount for housing. On the face of it, this looks like a progressive tax, targeting the profiteering businesses rather than their struggling employees. However, the Office for Budget Responsibility (OBR) has warned that higher employer NICs will be passed on in the form of lower wages or higher prices — with working people bearing up to 70 percent of the increase longer term.
The rate of corporation tax remains at just 25 percent, the lowest in the G7 and still below its 2008 level. Each 1 percent increase in corporation tax would give the Treasury £3.5 billion extra revenue, and it’s worth highlighting that corporation tax receipts are at a historic high as a share of total tax intake because profits have increased so much, so this would be low-hanging fruit. Labour have shied away from raising corporation tax because they don’t want to discourage ‘private investment’ or growth. And despite the UK having among the lowest rates of corporation tax and generous (and highly abused) credit incentives for research and development, UK business investment has remained weak. Decades of weakened workers’ rights have made UK businesses too reliant on cheaper labour to bother investing in productivity-enhancing technology.
Corporations are not using higher profits not to invest but instead engage in share buybacks or pay out dividends. To try to entice businesses to invest, Labour have devoted a substantial portion of the capital budget, funded by borrowing rather than tax, to ‘crowding in’ the private sector in certain key industries. While the government has a mandate to make a financial return on those investments, its effect is to subsidise the cost of investment for the private sector rather than developing its own state-owned industries — what economist Daniela Gabor calls derisking.
An End to Austerity?
To free up borrowing for investment, the Chancellor has performed some accounting trickery, highlighting the arbitrary nature of her own self-imposed fiscal rules. The adoption of a new method for calculating government debt has instantly wiped around 20 percent off the UK’s debt as a portion of its GDP. The previous measure of government debt only considered the liability side of its balance sheet, not its assets. By reclassifying public sector debt as ‘Public Sector Net Financial Liabilities’, the government is able to reduce its ‘net liabilities’ by taking into account the government’s financial assets, such as student loans, public sector pension funds and partially publicly owned banks like NatWest.
It’s a move that frees up £57 billion in public borrowing for investment aimed at stimulating growth in key sectors, such as engineering, biotech and medical services, as well as a small portion allocated for spending on things like infrastructure projects, like rail network electrification or equipment like MRI machines for the NHS. Gilt markets rose to a 5-month high after the budget was announced, but nothing like the response to the fatally disastrous Liz Truss budget two years ago. That financial markets have reacted so placidly to the extra borrowing is partly because it is relatively unambitious and, as a result, unlikely to stimulate much growth — hardly a cause for celebration.
This is not an austerity budget, but it is still completely insufficient to address over a decade of cuts or to meet the challenges facing the country. In her speech, the Chancellor bemoaned Britain’s lack of affordable housing but only pledged to invest in 5000 more affordable and social homes, a tiny portion of the 1.5 million that are needed. Labour have also failed to address the crisis of child poverty, and despite the relatively low cost of scrapping the two child benefit cap (£2-3 billion), which would lift millions of children out of poverty overnight, the Chancellor has chosen to keep it.
Overall, it does mark a much-needed boost in spending for the NHS, which will get a £22.6 billion increase in the day-to-day health budget, as well as a £3.1 billion increase in capital budget over this year and next — the largest increase in spending it has received since 2010. However, many government departments are facing cuts and questions over the sustainability of spending going forward are already looming. Much of the spending has been allocated to the first two years, with investment dropping off by 2027/28. Labour are hoping that this upfront spending will be enough to achieve higher growth and, therefore, increase overall receipts in the coming years. This seems unlikely because the OBR’s forecast in response to the budget barely changed from pre-budget forecasts — showing a fall from 2 percent in 2025 to around 1.5 percent annual growth by 2029.
Labour’s reforms to worker’s rights, higher minimum wages, education spending (£2.4 billion boost) and modest allocations for industrial strategy through new institutions like GB Energy and the National Wealth Fund could help the UK’s lacklustre private sector investment and productivity, but realistically the amounts are too small to have a tangible impact on growth. On top of that, global trends are working against the government’s growth ambitions. Not least of these geopolitical fractures are creating energy volatility and climate change-driven natural disasters that are reducing crop yields, increasing food prices, and spreading disease. Sooner or later, in the likely scenario that the promised growth doesn’t materialise, Labour will either have to take serious measures to tax wealth in order to keep public services like the NHS functioning — or go down the more ominous and well-trodden path of austerity and privatisation. For now, the government is treading water, and the rich are off the hook.