John Healey’s Next Tax Grab Could Be Pure Madness – Even Reeves Wasn’t This Unhinged
John Healey has been in the Treasury job for barely a month, yet the Chancellor is already facing growing pressure to raise taxes.
That prospect will alarm millions of households and businesses who were hoping that the change of leadership in Downing Street would bring a different economic approach. Instead, the warning signs suggest that the new government could be heading towards another difficult Budget in which taxpayers are once again asked to provide more money.\
Healey has refused to rule out tax increases at his first Budget, scheduled for October 28. At the same time, he has promised to give families and businesses some “breathing room”.
Those two positions are becoming increasingly difficult to reconcile.
The latest public-finance figures have made the situation even more uncomfortable. Britain recorded an unexpected £1.8 billion deficit in July, despite stronger-than-expected tax receipts. Borrowing during the first four months of the financial year has reached £56.7 billion, around £2.3 billion above the Office for Budget Responsibility’s forecast. Public debt has climbed to approximately £2.98 trillion, equivalent to around 94 per cent of GDP.
So the Treasury is under pressure.
But that does not automatically mean that another tax grab is the right answer.
The temptation to tax again
The easiest political response to a spending problem is often to look for another source of revenue.
The argument is familiar: government needs more money, therefore taxpayers must provide it.
But Britain is already carrying a historically high tax burden. More importantly, taxpayers have already endured substantial changes in recent years, including frozen income-tax and National Insurance thresholds that gradually pull more people into higher tax bands as wages rise.
That mechanism is particularly controversial because it can increase the amount people pay without any announcement that headline tax rates have gone up.
A worker receiving a modest pay rise can discover that more of their income is being taxed at a higher rate.
The Treasury receives additional revenue.
The taxpayer receives no corresponding sense that their tax burden has been deliberately increased.
It is hardly surprising that this has become a politically sensitive issue.
Healey has plenty of demands on his desk
The Chancellor is not facing one isolated funding problem.
He is attempting to finance the government’s ambitions on defence, infrastructure, housing, public services and the cost of living while simultaneously respecting fiscal rules.
The government has already promised measures including a VAT cut on household energy bills. There is also a significant gap in defence funding inherited from the previous administration. Analysts have estimated that around £5 billion may need to be found for defence investment.
At the same time, Prime Minister Andy Burnham wants a major expansion of public investment and regional development.
The result is an awkward equation.
More spending requires more money.
More money can come from economic growth, spending reductions, borrowing or taxation.
Growth would obviously be the most attractive answer.
Unfortunately, governments cannot simply order the economy to grow.
The danger of believing taxation can solve everything
This is where Healey should learn from Rachel Reeves.
The previous Chancellor also relied heavily on taxation to address Britain’s fiscal problems. Her measures produced substantial additional revenues, but they also generated concern among businesses and investors about the overall burden of taxation.
Healey now has an opportunity to take a different path.
Instead of automatically searching for another tax base, he could concentrate on making government spending more efficient, tackling waste and reforming areas where expenditure is growing too quickly.
That does not mean that every tax increase is automatically wrong.
Some taxes can be economically defensible.
The question is whether the government has exhausted other options first.
The bank-tax temptation
One of the most obvious targets is the banking sector.
A higher bank levy or windfall-style charge has already been discussed as a potential way of raising revenue. Analysts have identified a bank windfall levy as one option available to Healey.
But this comes with a warning.
JPMorgan chief executive Jamie Dimon has publicly cautioned the Chancellor against increasing taxes on banks, arguing that excessive taxation could encourage financial activity and jobs to move elsewhere.
The government might respond that banks are making large profits and can afford to contribute more.
But there is a wider economic question.
What happens if additional taxation reduces investment?
What happens if financial companies reconsider expansion in London?
What happens if the cost is eventually passed on to customers through higher fees or borrowing costs?
A tax that appears attractive on Budget day can have consequences long after the Chancellor has finished his speech.
Capital gains could be another target
Capital gains tax is another area attracting speculation.
Unlike the government’s political commitment concerning the main rates of income tax, National Insurance and VAT, capital gains taxation has been viewed as an area where there could be more room for manoeuvre.
One possibility would be to move capital gains rates closer to income-tax rates.
That might generate additional revenue, but it could also alter people’s investment decisions.
People do not make financial decisions in a vacuum.
If selling a business becomes substantially more expensive from a tax perspective, an entrepreneur may delay a sale. Investors may change where they put their money. Business owners may reconsider succession plans.
Tax policy therefore affects behaviour as well as government revenue.
Even professional tax advisers have warned that significantly increasing capital gains taxation could have economic consequences.
The stealth tax problem
Perhaps the biggest problem is not one spectacular tax increase.
It is the accumulation of smaller measures.
Frozen thresholds.
Higher taxes on savings.
Changes affecting rental income.
Future restrictions on pension tax relief.
Inheritance-tax changes.
A high-value council-tax surcharge.
Each measure can be presented as a targeted reform.
Taken together, however, they can create a significantly higher tax burden.
Some of these changes are already scheduled, with several taking effect over the next few years.
This raises an important political question.
At what point does a government stop asking taxpayers for more and start asking itself to spend less?
Britain has a spending problem too
The argument for tax rises is usually framed around a lack of revenue.
But Britain also has a spending problem.
Government borrowing is still high. Public debt is approaching £3 trillion. Debt-interest costs consume enormous sums that cannot be spent on hospitals, schools, defence or infrastructure.
The latest July figures demonstrated the problem perfectly: even record self-assessed income-tax receipts were not enough to prevent the government from recording a deficit because spending was rising faster than revenue.
That should make policymakers pause.
If higher taxes simply finance ever-increasing spending, the underlying problem remains.
The government needs to ask why expenditure continues to rise and whether every programme is delivering sufficient value.
Welfare is an obvious pressure point
Welfare spending is one area receiving increasing political attention.
Healey has already indicated that ministers will need to keep a close eye on spending, while the new government has ordered departments to identify savings to finance new commitments.
This is politically difficult.
People who genuinely cannot work or who require support must not be abandoned.
But a welfare system should also be designed to encourage employment wherever people are capable of working.
If spending rises continuously while the tax burden also rises, something has gone badly wrong.
The government should therefore examine eligibility, fraud, administrative inefficiency and incentives before automatically reaching into taxpayers’ pockets.
Borrowing is not a free alternative
There is also an argument that Healey could simply borrow more.
That would avoid an immediate tax increase and allow the government to invest in infrastructure and housing.
Some economists have argued that the government should make greater use of borrowing for productive investment, particularly because the fiscal rules provide some flexibility.
But markets are already watching closely.
The yield on 30-year UK government bonds has climbed to around 5.81 per cent, increasing the cost of borrowing. Investors are urging Healey to maintain fiscal discipline and avoid allowing borrowing to expand without a convincing economic justification.
Borrowing can therefore only be part of the solution.
Britain cannot borrow indefinitely simply because taxes are politically unpopular.
The October test
Healey’s first Budget will be the moment when these competing pressures collide.
The Chancellor has promised fiscal discipline.
He has also promised support for households and businesses.
Burnham wants more investment.
Defence spending needs additional funding.
Debt is already enormous.
Borrowing costs are high.
And tax revenues, despite being strong, are not keeping pace with expenditure.
This is precisely why the October 28 Budget matters so much.
Healey could choose the easy route and raise taxes.
He could argue that wealthy individuals, banks, investors or particular industries can afford to pay more.
But easy does not necessarily mean wise.
A different approach is possible
There is another option.
The government could prioritize economic growth above almost everything else.
That would mean making Britain more attractive to investors, reducing unnecessary regulation, improving infrastructure, increasing productivity and making it easier for businesses to expand.
It would also mean serious reform of public spending.
Every department should have to demonstrate that money is being used effectively.
Projects that do not deliver value should be cancelled.
Duplication between government bodies should be eliminated.
Waste should be attacked with the same enthusiasm ministers often display when announcing new spending.
And welfare reforms should focus on helping people into work while protecting those who genuinely need assistance.
If the economy grows faster, tax revenues can rise without necessarily increasing tax rates.
That is the sustainable way out.
Taxpayers deserve better
The British public should not be treated as an unlimited source of government revenue.
People work, save, invest and build businesses partly on the assumption that the rules will remain reasonably predictable.
Repeated tax increases undermine that confidence.
They can discourage investment and reduce the incentive to work or build businesses.
That is especially dangerous when Britain desperately needs stronger productivity and economic growth.
Healey therefore faces a choice.
He can continue down the familiar path of higher taxation and greater state intervention.
Or he can attempt something more difficult: reforming government, encouraging enterprise and creating the conditions for stronger growth.
The second option would be harder politically.
But it would also be more ambitious.
The verdict
It would be premature to claim that John Healey has definitely decided upon a major new tax raid. He has not announced one, and the government continues to insist that it is committed to fiscal discipline. Indeed, the Chancellor has explicitly said that already announced policies are funded, while refusing to rule out tax rises for the October Budget.
That distinction matters.
But the pressure is clearly building.
The unexpected July deficit, the £2.98 trillion debt burden, rising borrowing costs and the government’s spending ambitions have left Healey with difficult choices.
If his answer is simply to raise taxes again, taxpayers will rightly ask whether the government has learned anything from the experience of recent years.
Britain does not need another clever way to collect more money from the public.
It needs stronger growth, tighter control of spending and a credible plan to bring debt under control.
John Healey has the opportunity to deliver that change.
If he instead reaches for the tax lever first, he may discover that voters have far less patience for another tax grab than politicians expect.