Key facts
- Prime Minister Andy Burnham faces pressure to raise taxes in his October Budget.
- Burnham has pledged to stick to the Labour manifesto's promise not to raise income tax, national insurance, or VAT.
- Capital Gains Tax (CGT) is being considered as a potential revenue-raising measure.
- The government needs to find at least £4.7bn to cover a gap in the Defence Investment Plan.
- The fiscal headroom available to Chancellor John Healey is likely reduced due to the economic impact of the Iran war.
Prime Minister Andy Burnham is facing significant fiscal challenges as he prepares to deliver his autumn Budget, with limited options for raising revenue while adhering to previous commitments.
Burnham has acknowledged the UK's "challenging position" financially and stated that any fiscal decisions would be carefully considered and funded. However, he is under pressure to find funds for various commitments, including a £4.7bn gap in the Defence Investment Plan. He has also implemented cost-of-living measures like removing VAT from electricity bills and reducing bus fares, which need to be financed.
The government's fiscal headroom, a buffer against borrowing constraints, is likely to have shrunk from the £22bn left by former chancellor Rachel Reeves, partly due to the economic impact of the Iran war and rising borrowing costs for the national debt, which now stands at nearly £3tn. The closure of the Strait of Hormuz has also contributed to sluggish growth and creeping inflation.
Burnham has repeatedly stated his commitment to the Labour manifesto's promise not to increase income tax, national insurance, or VAT. This constraint has led to concerns among businesses about potential tax raids. While some within the party advocate for further wealth taxes, Burnham has expressed a reluctance to increase business costs or target "wealth creators." He has also indicated caution about unfreezing the personal allowance due to its cost.
One potential revenue-raising option being considered is increasing Capital Gains Tax (CGT). This idea is supported by figures like First Secretary of State Louise Haigh and Defence Secretary Wes Streeting, who views equalising CGT with income tax rates as a "wealth tax that works." However, the amount CGT equalisation could raise is debated, with think tanks suggesting figures ranging from £14bn annually, while sceptics argue it could lead to people delaying asset sales or moving abroad. Nimesh Shah, chief executive of Blick Rothenberg, suggested that even if full alignment is not pursued, increasing CGT rates to around 30%, reducing reliefs, or tightening exemptions could be options.
Burnham has also made popular early interventions to ease the cost of living, some of which are funded by cutting existing programs. Despite a VAT cut on energy, prices have risen by 4%, negating its impact. The Treasury is reportedly considering a contingency plan for further targeted support for vulnerable households in January, estimated to cost around £2bn.