Reeves will copy Brown’s stealth taxes

Something has to give, and it is possible to predict what it will be. Keir Starmer and Rachel Reeves have tied themselves tightly with the bonds of fiscal responsibility. They won’t make unfunded spending promises. They won’t raise taxes — in fact, they think the tax burden is too high. And they won’t increase borrowing — one of the shadow chancellor’s fiscal rules is to reduce public debt as a share of national income by the end of a parliament. Yet everyone knows that the government’s plans for taxing and spending after the election are unrealistic. Even if they were realistic, a Labour government would still want to spend a bit more, and cannot rely on unexpectedly fast economic growth to produce the cash.

So how would Labour, if it won the election, find the money? Jeremy Hunt, the chancellor, thinks he knows. He wrote two weeks ago that Reeves might have a secret plan: “To stick to Conservative fiscal rules ahead of the election and then quietly change them afterwards.” He thought Labour might “make the argument that investing in green energy was so important it should not really be counted as ‘borrowing’.”

It was a clever attack because there certainly are Labour people who think like that. Ed Miliband, the shadow energy secretary, is probably one of them. It was an argument that had been made four days earlier by Gavin Kelly and Nick Pearce, who both worked in the No 10 policy unit under Gordon Brown. They wrote in Renewal, a “soft left” journal: “An incoming Labour government should review the fiscal framework, with the intention of ensuring that high and stable public investment is prioritised, and is not, contrary to the practice of recent decades, the first casualty of efforts to meet the fiscal rules.”

However, I understand that Reeves — although she sits, along with Miliband, on Renewal’s editorial advisory board — does not agree. She accepts that borrowing is borrowing, whatever “investment” it is used for. That was why she “postponed” the plan to borrow £28bn a year for green projects. Some on the left had become used to thinking of public borrowing for investment as “free” because real interest rates were so low, but Reeves accepts that this is no longer the case.

That means, then, that whoever is in government after the election will have to either cut spending or raise taxes. The first is unattractive, and Reeves said in an interview with The Sunday Telegraph last month: “We don’t have any plans to increase taxes outside of what we’ve said.” When she was challenged that the “no plans” formula is a “non-denial denial”, she said: “It’s not a non-denial, it’s just a denial.”

So how will this circle be squared? The key lies in the phrase, “outside of what we’ve said”. Reeves has announced the abolition of non-dom status, which she claims would raise £3bn a year. The last Labour government didn’t think it would produce any net revenue, but it allows Reeves and Wes Streeting, the shadow health secretary, to promise modest extra spending on the NHS. It also allows for personal attacks on the prime minister’s family, if that is how Labour want to do their politics, although Akshata Murty, Rishi Sunak’s wife, has given up the immediate tax advantages of her non-dom status.

Reeves has also said that Labour will charge VAT on school fees, raising £1.6bn a year, which allows Bridget Phillipson, the shadow education secretary, to promise modest extra spending on state schools.

Those two small tax increases have already been allocated to pay for the few spending promises that Reeves has allowed her colleagues to make. If a Labour government needs more money, as it almost certainly will, it will have to come from somewhere else. Where?

Reeves’s office has pointed to a review of tax loopholes that she announced in her party conference speech in 2021. “We will look at every single tax break,” she said. “If it doesn’t deliver for the taxpayer or for the economy then we will scrap it.”

Here, then, is the money tree. It is not a magic tree, because scrapping tax reliefs and closing loopholes really can increase revenue. We know this, because a Labour chancellor has done it before. Gordon Brown, with his famous prudence and his reputation for ironclad fiscal discipline, had “no plans” to raise taxes before the 1997 election, but in his first Budget he raised £5bn a year by changing the tax treatment of pension funds. There were howls of anguish from some quarters about Brown’s “stealth tax”, but most normal people didn’t notice, and anyone who knew anything about it thought it was sensible to prune lightly the tax advantages enjoyed by pension funds for the better-off.

Reeves will be accused by the Conservatives of planning similar stealth taxes if Labour win. Andrew Marr reported in the New Statesman this week: “Labour’s Treasury team has … been looking at a long list of loopholes that they believe would generate billions of extra pounds, without raising tax rates.” Depending on your definition of “loophole”, anything that increases revenue is technically a tax increase, but Reeves can argue that, as she has already said she will review tax reliefs, a stealth tax of this kind is excluded from her claim not to have “any plans to increase taxes”.