Chancellor Steals Labour’s Money

Assuming Labour wins the next election (and that seems now all but certain) they will be inheriting a position every bit as bad, if not worse, than the one they left back in 2010.

There are reasons, of course, and any objective observer would accept that the combination of Covid and the stresses placed on the financial system by the war in Ukraine are chief amongst these.

Regardless, the point remains that the party that wins the next General Election will have very little room for fiscal manoeuvre.

Personal Allowances and tax bands are frozen through to 2028 and the impact of that is ‘baked in’ to the country’s budgets over that period. Put another way, if at any point over the next 4 years, Labour wished to increase the Personal Allowance, or raise the point at which a person becomes liable to higher rate tax, they will need to fund that from somewhere else – i.e.  increased tax elsewhere or lower spending.

Given that Labour have been very clear that its priority is to increase spending on public services, where would the money come from to fund that?

Labour thought it had an answer – the non-domicile tax regime that allows long time (up to 15 years) UK residents who are not UK domiciled to choose to keep their foreign income and gains sheltered from UK taxes. If this legislation was scrapped (or the benefits reduced) then all of those foreign income and gains would be taxed in the UK thus increasing the tax take and giving the room to invest more in public services.

Unfortunately, such things are rarely that straightforward. There are compelling arguments that such a change will, in the long term, serve to reduce the tax take and stifle the economy as the individuals impacted (and particularly those not yet effected but who would be if they came to the UK) adjust their behaviour accordingly and stay completely out of the UK tax net.

However, via clever manoeuvring it is relatively straightforward to guarantee a short-term benefit. For example, you can announce a new system of taxing those individuals that will be considerably worse for them in future than the current system, but then give those who will be impacted a ‘one-off opportunity’ to bring funds into the country at a low tax rate.

The result of people taking advantage of that opportunity will be a one-off inflow of tax to the coffers, allowing increased spending pledges to be met. If there is, indeed, a longer term negative that results from such a policy change then that is a problem for another day, some years off – and possibly it is somebody else’s problem!

Jeremy Hunt had presumably looked at this policy and realised what was going to happen. If Labour were going to take this gamble and use the initial funds to achieve their political aims, he may as well get in first. And that is what he has done. He has proposed a policy that will bring additional tax in – and has spent those extra funds on tax cuts.

The upshot is that the rug has been pulled out from beneath Labour’s feet.

The question now is, where will the next Government turn to raise cash? The list is short.