Labour May Need to Raise Taxes on UK’s Wealthy, Economists Say

(Bloomberg) -- A Labour government might have to increase taxes on the wealthiest Britons to get the national debt falling, according to a new analysis.

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Keir Starmer has ruled out increasing income tax, corporation tax, national insurance or VAT — which together make up two thirds of all government revenue — if his opposition party wins the July 4 general election. But a weak growth outlook makes manifesto promises to stabilize debt look undeliverable unless Labour looks across the tax base, according to a Bloomberg Economics report.

“The strategy might win it more support but it significantly reduces the party’s options for dealing with the fiscal challenge that awaits it if it comes to power,” said economists Ana Andrade and Dan Hanson. “A focus on wealth, pensions and businesses will likely be needed to keep the public finances on track.”

BE said there are “no obvious” policy levers as the UK’s tax burden was in line with levels seen among Group of Seven peers. Euro-area countries had a bigger average tax burden, with the state traditionally a bigger pensions contributor in those places.

Capital gains is one of the main options on the table. Shadow Chancellor Rachel Reeves has floated aligning tax bands for capital gains with those for income, with the top rate going from the current 28% to as much as 45%. Changing CGT could bring anywhere between £7.5 billion ($9.5 billion) and £17 billion, though the “mobile nature” of those affected means an increase could end up costing the government instead, BE said.

Other targets could include council tax — a levy on residential property — and reducing the generosity of pensions-tax relief for higher earners. The latter could raise as much as £13 billion for the Treasury but would face a backlash from many voters.

“To significantly ease the pressure on public finances, Starmer would need to eye additional reforms to the tax system. The issue is that the policies that are more fiscally attractive are also politically less palatable,” Andrade and Hanson wrote.

“With no obvious policy lever to reach for, Labour will have to get creative.”

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