Reeves will tax rich to fill black hole

Rachel Reeves has signalled the better off will be forced to “contribute more” as she prepares to raise taxes at the Budget.

Treasury sources have said that the Chancellor will not cut spending on public services or significantly increase borrowing, as she looks to plug a £20-30bn black hole in the public finances.

It will leave her with no option but to increase taxes substantially.

Ms Reeves will argue that growth boosting reforms, such as a further loosening of planning rules, can avoid the need for tax rises on “working families”. She will instead target those with higher incomes or more wealth, The Telegraph understands.

Sources close to the Chancellor said: “She will be fair when asking those to contribute more to rebuild our public services.”

A Treasury insider added she was prepared to take “tough decisions” because the “stability” of the public finances is at risk, but insisted there would be no “return to austerity”.

They added that the British economy was facing a “once in a generation challenge” for which there were “no quick fixes”.

They said that the Chancellor was determined to “maintain a tight grip on public spending and wage a war on waste” to keep inflation and interest rates down.

“Borrowing more would put our public finances in jeopardy, saddling future generations with more debt, while a return to austerity would condemn the country to decline,” they said.

It is the clearest indication yet that she is planning a tax raid on wealthier families.

It comes after Government analysis found that increasing capital gains tax, as demanded by left-wing MPs, could end up costing the exchequer £3.6bn a year.

There has been widespread speculation that Ms Reeves is plotting raids on property, investments, pensions and inheritance to the tune of tens of billions.

Some economists have said that wealth taxes, as well as levies on banks and gambling, will not raise the money Ms Reeves needs to balance the books.

They have said the Chancellor may have to break Labour’s manifesto commitment and raise one of the three big taxes: income tax, National Insurance or VAT.

Speculation of major tax rises has been fuelled by reports that she wants to increase the £10bn of headroom she left herself at the last Budget.

Treasury sources said Ms Reeves plans to build up a bigger buffer so that she is not as vulnerable to volatility in the bond markets and rising borrowing costs.

But doing so could mean she needs to raise significantly north of £30bn next month, with much of the extra revenue expected to come from raising taxes.

She is expected to make a series of pro-growth announcements in the run-up to the Budget on Nov 26 in the hope of reducing the fiscal deficit she faces.

Earlier this year, the Office for Budget Responsibility (OBR) said that the planning reforms already announced by ministers will add £6.8bn to the economy by 2030.

But the fiscal watchdog, whose projections will determine how much headroom Ms Reeves has next month, has historically been reluctant to score other measures.

In particular, it has said that potential savings from back-to-work programmes to get people off benefits are too uncertain to include in official spending forecasts.

A Treasury source said Ms Reeves was “laser focused on pulling every lever to stimulate growth across the country and get our economy firing again”.

“Be it ripping up regulations and red tape to get Britain building the transport links and housing we need, to creating the conditions to stimulate investment and bring prosperity to every region, she will ensure the Government goes further and faster on growth – creating a fair economy that rewards working people.”

‘Brexit to blame’

Ms Reeves is also expected to try and blame Brexit for her predicament, arguing that it has caused the OBR to downgrade its productivity forecasts.

She and Keir Starmer are preparing to attack Nigel Farage on the issue, saying that he campaigned to take Britain out of the EU without an economic plan.

It would represent a major change of tack from No 10, which has been reluctant to criticise Brexit for fear of alienating Leave voters in the Red Wall.

Labour has put a heavy emphasis on growth as central to its economic plans, but Ms Reeves has been accused of damaging it with her tax rises.

In particular, her decision to increase employers’ National Insurance at the last budget has been blamed for stifling business investment and reducing job opportunities.

Food and drink manufacturers have said that the raid is also directly responsible for the fact that Britain is suffering higher inflation than its European counterparts.

Left-wing Labour MPs have been pressuring Ms Reeves to go even further on taxing wealth, such as by equalising capital gains tax with income tax.

But it can be revealed that HMRC has warned her that a 10 percentage point increase in the higher rate of capital gains tax would end up costing £3.6bn by 2028-29.

The taxman’s analysis suggests investors, rather than accept higher taxes, would radically alter their behaviour, typically by simply not selling their assets until a new government comes in or they pass away.

Ms Reeves raised the higher rate of capital gains tax from 20pc to 24pc on most assets at her last autumn Budget.

Any attempt to go further by tinkering with the headline rate will probably end up costing her, the HMRC’s figures show.

Raising the rate by five percentage points would cost £870m a year before the end of the decade, while going even one point higher would cost £30m.

Andrew Griffith, the shadow business secretary, said: “Given these figures, it would be a costly prejudice to further increase capital gains tax. The Chancellor should follow the numbers and rule this out now.”

The analysis also shows the Treasury would lose money by taxing stamp duty on second homes only one percentage point more, costing £50m by 2028-29.

Stuart Adam, from the Institute for Fiscal Studies, said: “Stamp duty rates at the top of the property value distribution, and especially for rental properties and second properties and so on, have got extremely high. It’s quite plausible that those top stamp duty rates may be over the top of the Laffer curve.”

The Laffer curve refers to the relationship between taxes and government revenue, suggesting once rates go beyond an optimal point, they lose rather bring in money.

[Source: Daily Telegraph]