Rachel Reeves is being warned that a massive increase in capital gains tax could jeopardize her hopes of generating economic growth.
It comes as a row has broken out over claims the chancellor asked Treasury officials to model capital gains tax rates of 39 per cent and 33 per cent, well above the second housing rate of 24 per cent.
While sources close to Ms Reeves have sought to play down budget speculation and claims of disorder, concerns have fallen at a time of intense pressure on the chancellor and Sir Keir Starmer. It follows:
- Institute for Fiscal Studies warns she will need to raise £25 billion in extra tax to meet Labour’s spending commitments
- Labor support falls to less than 30 per cent in Techne UK’s weekly tracker poll for the first time in more than two-and-a-half years as voters turn their backs on the new government
- Starmer repeatedly refuses to rule out an increase in employer contributions to National Insurance – a move critics say will destroy jobs
- Questions persist over Labour’s plans to tax non-doms and add VAT to private school fees.
- Criticism that Reeves should have kept his first budget earlier
The dispute over capital gains was broken into The Guardianwho claimed to have seen papers on modeling requested by Ms Reeves for an increase of up to 39pc.
A source close to the chancellor dismissed the story, denying the government was in “disarray” over its tax plans, adding they “would not be drawn on budget speculation”.
But with the budget set for October 30, time is running out for Mrs Reeves to plug a £25bn gap. in her expenditure commitments and available funding identified by the Institute for Fiscal Studies (IFS). This is on top of the £22bn “black hole” which Ms Reeves claims was left by the Tory government.
The IFS has speculated that Ms Reeves might try to change her fiscal rules to loosen her ability to borrow, but its director Paul Johnson warned that “this could spook the markets”.
Instead of cutting spending on things like winter fuel payments for 10 million pensioners and canceling future aged care, it is thought Ms Reeves will have to look at raising taxes.
But her hands are tied because of Labour’s election promise “not to raise taxes on working people”, including income tax, VAT or social security contributions.
But Mrs Reeves is being warned that her hopes of generating economic growth will be damaged by raising capital gains tax, even though experts believe she could make it fairer.
Currently, capital gains tax (CGT) accounts for £15 billion a year for the Exchequer, less than 2 per cent of turnover, and is levied on around 350,000 people.
Two-thirds of CGT income comes from just 12,000 people (0.02 per cent of the adult population) who earn an average of £4m.
Stephen Millard, deputy director of the National Institute of Economic and Social Research, said: “CGT is a tax on savings, something that UK households do not do enough of. By increasing CGT, the Government would discourage savings, which could have a knock-on effect on investment.
“And given the emphasis that the current government has placed on growth, this would not be something they would want to do.
“The big question, of course, is the extent to which an increase in CGT to the 33 to 39 per cent would delay savings. For example, it could simply result in households transferring their savings from second homes and shares into pension funds or ISAs without impact on total savings.”
He added: “More generally, however, there is a need to simplify the way CGT works. Another principle of good taxation is to broaden the base and lower the rate; a reform of CGT along those lines – ie reducing the number of assets, that are exempt from CGT, while lowering the rate – would be better than raising the rate on shareholdings and holiday homes.”
Helen Miller, deputy director at the IFS, said: “Capital gains tax is a small but important tax. Its design is flawed and this affects both the efficiency and fairness of the tax system.
“The new chancellor should use his first budget to create a capital gains tax that is fairer and more pro-growth. The only way to do this is to reform the tax base alongside increased tax rates. Getting the design of any reform right is crucial. But a sensibly reformed CGT would be a significant price and should be prioritized regardless of how much revenue she would like to raise overall.A good reform would also make it easier to raise significant additional revenue.
“If the Chancellor chooses to raise CGT rates while leaving the flawed tax base unchanged, she would be choosing to raise some limited revenue at the cost of weakening incentives to save and invest and further distorting which assets people buy and for how long own them too. That would not be the decision made by a chancellor who was serious about growth.”