Can Burnham avoid a re-run of last year’s pre-Budget mayhem? The signs aren’t good.
- The Chancellor’s headroom has dropped from £22bn to around £15bn
- Prime Minister Andy Burnham refused to rule out tax rises in the October budget.
- Speculation is already mounting about possible tax rises
Advisers may have needed a stiff gin this week, as Prime Minister Andy Burnham refused to rule out tax rises in the October budget. Many will foresee a re-run of last year’s Budget fiasco, which became a mess of kite-flying and denials. Will the next two months be a bin fire of panicking clients needing to be stopped from impulsive and wealth-destroying moves?
It is possible. The chunky headroom that Rachel Reeves built up as Chancellor has now been eroded by higher bond yields and inflation in the wake of the war in Iran. Economists suggest the cushion may have dropped from £22bn to around £15bn. Burnham has also made some uncosted spending commitments, including on defence. Chancellor John Healey has said he will stick to the fiscal rules. With no spending cuts likely and more borrowing impossible, that only leaves tax rises.
Burnham’s comments have already set the hares running and as usual, the focus has been on three main areas – capital gains tax, pensions and property taxes. There are already rumours that capital gains tax could rise to be in line with income tax. The evidence is that this would probably raise less money rather than more - HMRC research suggests a ten-percentage-point increase in the higher rate of capital gains tax would reduce revenues by about £3.6 billion – but the government may still give it a try.
The next source of speculation is pensions relief. Every budget sees rumours that the government will pare back tax relief on pensions. However, the fact that successive governments have looked at reducing relief and decided against should give advisers some hope that the Treasury is in favour of its retention.
Burnham has previously argued that land is “undertaxed” and has mooted the option of a Land Value Tax to replace council tax and stamp duty. This may be a long-term option, but Burnham has already ruled out immediate changes, The system is certainly a mess, but it will take longer than a few months to overhaul it and any measures need to be introduced gradually to avoid destabilising the housing market. For the time being, he may lower the threshold for the incoming mansion tax.
The most popular option would be taxes on unpopular industries such as banking, or oil and gas. However, adding more deterrents to list on the UK’s already-struggling stock markets wouldn’t be great news either. Nevertheless, oil and gas taxes raise revenues when fuel prices are rising and may have an elegant simplicity to them.
Having ruled out raising any of the major taxes in the Labour manifesto, every potential tax raising measure creates complexity and worse, is an insecure way to raise revenue for the government. It could give advisers a major headache over the next few months as they try to prevent clients making impulsive changes.
