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How Labour is planning to push Britain’s tax burden to a record high

Starmer
Sir Keir Starmer has pledged to rebuild Britain - Anthony Devlin/Getty Images Europe

Labour’s raid on private schools, non-doms and energy giants is poised to push Britain’s tax burden to a new record high, leaving households paying the equivalent of £1,100 in extra taxes by the end of the decade.

During the launch of its manifesto in Manchester on Thursday, Sir Keir Starmer pledged to grow the economy and rebuild Britain.

The Labour leader sought to reassure the middle classes by declaring he was “pro-business and pro-worker”, describing his Opposition as the “party of wealth creation”.

However, his commitment to more than £8.5bn of tax rises will cement a post-pandemic increase in the overall tax burden.

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Responding to Labour’s manifesto launch, Jeremy Hunt branded Sir Keir’s plans a “tax trap manifesto” containing “only tax rises and no tax cuts”.

The Chancellor said: “Under Labour’s published plans, taxes will rise to levels never before seen in this country.”

Here’s how the Conservative and Labour manifestos compare on tax, spending and growth.

Tax

Labour has pledged to raise more than £8.5bn in extra taxes by the end of the decade by ending the VAT and business rates exemption for private schools and closing tax breaks enjoyed by non-doms.

An additional tax raid on oil and gas companies, private equity firms and foreign home buyers will also help bolster coffers as Sir Keir pursues an expansion of the state.

By contrast, the Tories have pledged £17bn of tax cuts, including another 2p off national insurance at a cost of £10bn. They have also pledged to abolish the tax altogether for self-employed workers.

Handing back child benefits to around 700,000 middle-class parents with one high earner and cutting stamp duty for first-time buyers are among the other Tory manifesto pledges.

Britain’s tax take was already on course to rise to its highest share since 1948 thanks to Mr Hunt’s stealth tax raid, which will see the point at which people start paying income tax frozen until 2028-29.

Threshold freezes across the income spectrum, including a reduction for top earners, means there will be 3 million more people paying the 40p or 45p rate of tax by the end of the decade.

The Office for Budget Responsibility (OBR) already expects the tax burden to rise to 37.1pc of GDP by the end of the decade. This is four percentage points higher than pre-pandemic levels of 33pc.

The Tories’ tax-cutting plan would get this down to 36.7pc of GDP, according to the Institute for Fiscal Studies (IFS). Under Labour, it would hit a new record.

The Resolution Foundation said: “Labour’s plans to raise taxes by £8.5bn a year over the next parliament, coupled with £23.5bn post-election tax rises announced by Jeremy Hunt in the last parliament, would leave the UK’s tax-to-GDP ratio rising from 36.5 per cent in 2024-25 to 37.4pc in 2028-29 – equivalent to a tax rise of £1,100 a year per household (in 2028-29 prices) – with the UK’s tax take reaching its highest on record.”

Mike Brewer, interim chief executive of the think tank, said Labour’s spending plan “sets the scene for a parliament of tax rises”.

Spending

Both parties have pledged to spend more money. For the Tories, the biggest increase is in defence spending, which will rise from 2pc of GDP to 2.5pc by the end of the decade.

Labour’s big spending pledges include a plan to borrow billions of pounds to fund net zero, as well as plans to reduce NHS waiting lists, fund breakfast clubs and hire thousands of new teachers. Its green energy proposal includes extra borrowing of £3.5bn a year.

The Tories are funding most of their tax cuts with a £12bn squeeze on benefits. Both parties also want to crack down on tax avoidance and evasion, while the Tories have said they will cut the number of civil servants.

Paul Johnson, the director of the IFS, said: “Those are definite giveaways paid for by uncertain, unspecific and apparently victimless savings. Forgive a degree of scepticism.”

In order to keep the reins on expenditure, Rachel Reeves has pledged to balance the books on day-to-day spending, a rule that allows her to borrow for net zero.

Both parties have committed to getting debt down within five years.

Goldman Sachs has suggested that the shadow chancellor could – with the stroke of a pen – give herself almost £15bn of extra headroom by changing the way debt is measured.

It said that would leave her with £25bn of headroom as opposed to £8.9bn, while still remaining within the letter of her rules.

Mr Johnson added that Labour’s “big” promises in areas such as health would “require big spending too”.

He added: “All that will leave Labour with a problem. On current forecasts, and especially with an extra £17.5bn borrowing over five years to fund the green prosperity plan, this leaves literally no room – within the fiscal rule that Labour has signed up to – for any more spending than planned by the current government.

“And those plans do involve cuts both to investment spending and to spending on unprotected public services. Yet Sir Keir effectively ruled out such cuts. How they will square the circle in government we do not know.”

Growth

The cure-all for strains on taxes and spending is economic growth.

Any Government which presides over higher GDP will benefit from higher tax receipts and lower spending on benefits.

At the top of Labour’s list of “five missions to rebuild Britain” is a promise to “kickstart economic growth to secure the highest sustained growth in the G7 – with good jobs and productivity growth in every part of the country making everyone, not just a few, better off”.

Forecasts for the coming years indicate the UK is currently on track to record the third-fastest growth in the G7.

Predictions from the International Monetary Fund (IMF) indicate that between now and 2028, Britain’s GDP will grow by 1.6pc per year on average.

That is behind the US and Canada, and fractionally ahead of France.

Topping the leaderboard means getting growth to 2pc on a sustainable basis.

The Conservative manifesto does not set out a precise growth target, aspiring instead to create “a secure, dynamic and growing economy”.

However, it does note that Britain has the third-highest growth rate in the G7 since 2010.

If the goal is to carry on as such, then those IMF forecasts suggest the country is already on track to achieve this in the years to come.

But Jeremy Hunt has also stressed that “the lower-taxed economies of North America and Asia generally grow faster than the higher-taxed economies of Europe”.

If emulating the economies of the US and Canada is the goal, then that is similar to Labour’s target. However, the challenges are clear and the consequences significant.

Goldman has already warned that even slightly slower growth will leave Britain’s debt on an ever-rising path.

This is particularly acute as each party promises to take on the country’s ills.

The Tories want to tackle worklessness with lower national insurance and tighter rules on benefits to encourage more people into jobs.

While Labour is promising 1.5 million more homes over the next Parliament, “restoring mandatory housing targets” and changing the rules to build more on the green belt.