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. Just 50 families have more wealth than the bottom 50 percent of the population, who own less than 5 percent of total wealth. 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, or 4.3 million. Research 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 will be passed on to workers in the formers of lower wages and higher prices. The bottom line is that while Labour has scraped through the budget with enough spending to break with 14 years of Conservative austerity, much of the additional tax to pay for this will come from ‘working people’ — despite the party’s promise.
Wealth or Workers
One of the key announcements in the Chancellor’s speech is that Labour will maintain the freeze on 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.
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 in inheritance tax for agricultural land, impacting a small number of wealthy farmers, and a 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.
Capital Gains Tax should be equalised with income tax alongside reforms to the tax base to protect investment and close down avoidance mechanisms. The Institute for Fiscal Studies supports the call for equalisation, saying it would be a good measure for growth. At their current level, CGT reforms will only bring in an extra £2 billion annually, as will the modest reforms to inheritance tax targeted at agricultural property reliefs. Combined, these taxes on the wealthiest add up to 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, charging just 2 percent on assets worth over £10 million, could raise £24 billion. Despite the rhetoric, Reeves doesn’t have an appetite for taxing the rich.
By far the biggest contributor to the additional £40 billion in tax raised in the budget is the increased rate of employer national insurance contributions and the reduction of 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 housing. On the face of it, this looks like a progressive tax, targeting profiteering businesses rather than their struggling employees. However, the Office for Budget Responsibility (OBR) has warned this change may lead to stagnant wages or higher prices, with ‘working people bearing up to 70 percent of the increase.
The rate of corporation tax remains at just 25 percent, the lowest in the G7 and below its 2008 level. Each 1 per cent increase in corporation tax would give the Treasury £3.5 billion in extra revenue. It’s also worth pointing out that corporation tax receipts are at a historic high as a share of total tax intake because profits have increased so much above the rate of inflation. Despite the low corporate tax rate and high profits, the UK’s investment in fixed capital remains weak. Decades of weakened workers’ rights have made UK businesses too reliant on cheaper labour to invest in productivity-enhancing technology. Corporations are using higher profits not to invest but to engage in share buybacks. Labour, however, is attempting to address this by substantially increasing the minimum wage rate, strengthening workers’ rights, and ‘crowding in’ investment with a targeted industrial strategy.
An End to Austerity?
To free up borrowing for investment, the Chancellor has performed some accounting trickery that has instantly wiped around 20 percent off the UK’s debt as a portion of its GDP. The previous measure of debt only really considered the liability side of the government’s 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 publicly owned banks like NatWest). It’s a smart move, which frees up £57 billion in public borrowing for investment. In response to the announcement, gilt markets (linked to the cost of government borrowing) rose to a 5 month high, but this is nothing like the response to fatally disastrous Liz Truss budget two years ago.
Financial markets seem to have accepted the extra borrowing for now because it has been set aside for capital spending. A sizeable portion is aimed at crowding in investment to stimulate growth in key sectors, such as engineering, biotech and medical services, as well as spending on things like MRI machines for the NHS staff that will help to increase capacity, reduce waiting times and help some people with untreated long-term sickness back to work. Day-to-day ‘revenue expenditure’, like paying NHS staff, will only be funded by tax. Some argue that the ‘crowding in’ of new investment is akin to a new form of PFI, with the government effectively providing a subsidy to businesses. Another concern is that under the rules set out by the chancellor, the investments must generate higher financial returns than the cost of borrowing, which could lead the government to avoid investing in some of the riskier industries most needed, like renewable energy, for a green transition.
This is not an austerity budget, but it’s also not as progressive as Labour would like the public to believe. Overall, this does mark a significant 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 and desperately needed. However, questions over the sustainability of this spending going ahead are already looming. Labour has put a lot of political stock in being able to achieve higher growth, but the OBR’s forecast in response to the budget barely changed.
Labour might hope that the OBR is too conservative in its estimations and that reforms to workers’ rights, higher minimum wages, education spending (receiving £2.4 billion boost) and modest allocations for industrial strategy through new institutions like GB Energy and the National Wealth Fund could help to solve the UK’s lacklustre private sector investment and productivity. In reality, global forces are working against the government’s growth ambitions, not least geopolitical fractures and climate change-driven natural disasters. Higher temperatures are reducing crop yields globally and putting continued pressure on food price inflation. Sooner or later, in the possible, if not likely, case that the promised growth doesn’t materialise, Labour will have to take serious measures to tax wealth if public services like the NHS are to continue functioning. For now, the government is treading water, and the rich are off the hook.