All eyes on UK’s Reeves and her tax moves at Nov 26 Budget

[LONDON] British Chancellor of the Exchequer Rachel Reeves has an unenviable and almost impossible task of presenting a Budget to pull the country out of stagflation.

Her much-awaited Budget speech will take place on Nov 26, and she has been banking on economic growth to raise revenue.

But there has been so much business uncertainty in the past few months, with third-quarter growth coming in at only 0.1 per cent. Inflation of 3.8 per cent is well above the Bank of England’s target of 2 per cent, while the UK’s latest unemployment rate topped 5 per cent.

The British Retail Consortium (BRC) said this week that speculation of a higher income tax announcement in the Budget has caused more people to worry about the economy and the cost-of-living pressures.

About 60 per cent of Britons expect the economy to worsen over the next three quarters, while only about 14 per cent expect things to improve, according to the BRC’s sentiment monitor. The net score of minus 44 was the worst since April this year.

It is still a big question mark as to whether Reeves will indeed raise the income tax rate, with various British media reports quoting sources that she has abandoned plans to do so. A hike will be a major U-turn of the Labour Party’s 2024 election promises.

Reeves has maintained that she needs to show the markets that the government is fiscally prudent and needs to raise £30 billion (S$51.2 billion) a year to balance the books.

State borrowing is 96 per cent of gross domestic product or around £3.5 trillion, according to the latest figures from the Office of National Statistics. If investors dump gilts, the annual interest on government bonds and other loans will rise further from the already steep levels of £105 billion.

From a political standpoint, Reeves and her boss, Prime Minister Keir Starmer, have seemingly nowhere to hide.

SEE ALSO

UK consumer sentiment slides ahead of budget, retailers say

Multimillion-pound home sales drop sharply before UK Budget

UK’s Starmer, Reeves ditch budget plan to increase income tax rates: FT

Both higher taxes and lower state spending are annoying disgruntled voters. To be fair to the Labour government, however, the likes of Germany, France and many other European nations are also in a similar position.

According to a City AM/Freshwater Strategy poll, 66 per cent of respondents felt that Reeves should quit if she chooses to raise income tax levels.

A separate YouGov poll shows that 61 per cent of respondents believe that Reeves is doing a bad job, with only 9 per cent saying that she is doing well. Starmer’s popularity has also tumbled of late, with the opposition Reform Party well ahead of the Labour government in the latest round of polls.

If Reeves doesn’t raise income tax levels, she could freeze tax thresholds and this move could raise as much as £10 billion a year with more workers going into higher tax bands through the so-called “fiscal drag”.

Widespread salary increases have drawn thousands of employees into a marginal 40 per cent tax bracket when their earnings rise to just over £50,000 a year.

Under the Treasury’s complex tax rules, the marginal rate can rise to more than 60 per cent for those earning more than £100,000 a year. 

Reeves has also hinted in recent weeks that she would taper some pension contribution tax avoidance loopholes. Landlords may also have a higher tax burden as well.

She may also raid 190,000 high-paid solicitors and accountants who use limited liability partnerships to lower tax and national insurance payments. Another potential measure is to encourage councils to raise tax on the most expensive properties.

The Institute for Fiscal Studies estimates that doubling council tax rates on these properties could raise over £4 billion a year. The profits of online casinos, slot machines and high-stakes betting may also incur a new gambling tax of some sort, although Reeves is likely to exempt the UK’s lucrative horse-racing industry.

Both the Confederation of British Industry and the Institute of Directors have warned Reeves that further increases in corporate tax would discourage direct investment and lead to further redundancies.

In her previous Budget earlier this year, Reeves hiked national insurance and introduced an inheritance tax on farms and other family businesses.

“Business confidence hit a record low in September, with cost pressures – particularly employment costs – continuing to rise,” said Anna Leach, the chief economist of the Institute of Directors. “There’s real concern that the upcoming Budget could intensify these pressures.”