Labor risks creating its own £80 billion black hole

Instead of boosting growth, the government’s economic plans are likely to cause serious damage, making the country’s finances much worse by the end of this decade. This is evident from a study by the Center for Economics and Business Research (CEBR).

The think tank calculates that the overall effect will be a reduction in national output – or gross domestic product – of almost 9 percent by the end of the decade, assuming Labor remains in power and the policies are not reversed. It would also result in a black hole in the public finances of more than £80 billion a year.

That’s partly because higher taxes cause people and businesses to change their habits, but also because tighter fiscal policy leads to slower growth. The policy may initially result in higher revenues.

But so-called “static tax breaks,” which assume people won’t change their behavior, can quickly evaporate as individuals and companies take action to avoid paying more. This may lead to lower tax revenue in the long term.

The Mail on Sunday asked CEBR to look at what is known about the Chancellor’s plans to fill Britain’s controversial £22 billion a year ‘black hole’.

This work has been done as part of a wider project, the Growth Commission’s Autumn 2024 Growth Budget, which will be published on Tuesday. Douglas McWilliams, vice-chairman of the CEBR, said: ‘The three most economically damaging potential policies are the alignment of capital gains tax with income tax, the workers’ rights package and the premature introduction of a net-zero tax.’

The government says growth is central to its ambitions. Yet this independent analysis suggests that her policies will have the opposite effect: in the long run, tax revenues will fall. If it is even broadly correct, this will be terrible for all of us. Here is the impact of the main measures the government could take:

Capital gains tax

An increase in capital gains taxes will reduce economic activity. The government has denied that the tax will be aligned with income tax as initially suggested, which CEBR predicted would lead to a 0.9 percent drop in GDP in 2030. But even a smaller increase would lead to a decline in savings and investment expenditure. and entrepreneurial activity.

NI contributions

If the rate of employers’ national insurance contributions were to rise by two percentage points, it would raise £16.2 billion a year. But we know from the corporate response that companies are likely to hire fewer workers, cut jobs and curb wage increases.

The CEBR concluded that not only would tax revenue be much smaller, but that the measure would reduce GDP by more than 1 percent by 2030.

Workplace reform

The plan is to make it more difficult for employers to fire staff and to give employees more rights.

Labor is keen to appease unions, which has put it at odds with some of the foreign investors it is seeking. This tension was recently highlighted when Deputy Prime Minister Angela Rayner and Transport Secretary Louise Haigh announced legislation to protect seafarers and attacked P&O Ferries, prompting parent company DP World to threaten to secure a £1 billion investment. The CEBR model assumes that workers’ rights will result in a decline in productivity in unionized parts of the economy, especially the public sector. This will lead to a 1.3 percent decline in GDP by the end of the decade and an immediate deterioration in the government’s financial position.

Tax-free pensions

Most retirees can withdraw 25 percent of their pension pot tax-free. If Reeves were to stop this, it would theoretically raise £5.5 billion in tax. But besides making retirees poorer, it would also reduce savings and investment, reducing GDP by almost 1 percent by 2030. The resulting reduction in government revenues would more than offset any short-term increase in tax revenues.

Inheritance tax

One proposal is to eliminate the business ownership exemption from the estate tax. Currently, the support covers business assets passed on to surviving relatives, including shares in companies listed on the AIM market and agricultural land. The Institute for Fiscal Studies calculated that this would raise £3.4 billion a year. The CEBR assumes this figure does not take into account the impact on growth, and says the 0.3 percent fall in GDP in 2030 would lead to a fall in other tax revenues of £10.7 billion per year .

Business rates

The CEBR estimates that if business rates were to rise by 20 per cent, this would add £5.9 billion to the expected £29.5 billion in tax revenue this financial year. But this doesn’t take into account the impact on growth, especially of retailers, pubs and restaurants. The impact on GDP would be at least 0.5 percent in 2030, according to the CEBR, wiping out all gains.

Energy policy

The CEBR has looked at the impact of producing carbon-free electricity and banning the sale of new fossil fuel vehicles by 2030 – although this date has been pushed back to 2035 – and guaranteeing rental properties that meet the new energy standards. It estimates that current plans will reduce growth by 0.6 percent in the next financial year, and that energy policy will be the biggest drag on economic growth for the rest of this decade, with a 2.8 percent reduction in growth. So far, Britain has managed to become greener as old heavy industries, which use a lot of power, have been displaced by service sectors. But in the future, artificial intelligence will lead to a huge increase in electricity consumption.

Non-dom status

Reeves has reportedly reversed plans to end the ‘non-dom’ regime, under which non-domiciled foreigners living in Britain can for a limited time only pay tax on their UK income rather than about their worldwide assets.

According to the CEBR, this would have cost 0.5 percent of GDP by 2030 and lost £5 billion a year in tax revenue as high earners, including 50 to 80 top footballers, would leave the country.

Plan reform

An advantage of government policy is the relaxation of planning. This could boost growth by up to 0.4 percent in the next fiscal year, which is good, but not enough to offset the damage. It is estimated that with other measures the government would be £31 billion better off next year, but would need to borrow an additional £83 billion a year to cover costs by the end of the decade.

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