Tax gaps

Jeremy Hunt has forced Labour to fill the gap in its tax and spending plans quickly, but not for the reason you think

Jeremy Hunt, Labour likes to say, gives with one hand and takes with the other. For example, at the Budget last month, he took away the funding mechanism for some of Labour’s most important spending commitments, by scrapping the non-dom tax regime. And he gave them a brand new attack line, by promising to abolish National Insurance Contributions without setting out how he was going to pay for it.

At the time, the non-dom move looked like a big risk for Labour. That was certainly the point of it. Opposition tax and spending policy (or, more accurately, the money that opposition parties say they would raise and spend differently from the government if they were elected - oppositions don’t get to raise or spend any real money at all, because they’re the opposition) is always constrained in ways that government tax and spending policy isn’t.¹

So by taking Rachel Reeves’ policy on non-doms, Jeremy Hunt was also taking away the revenue she had earmarked to pay for various things including more operations in the NHS, more dentistry appointments and breakfast clubs in primary schools. Hunt was giving her a choice: drop the policy commitments, find new revenue-raisers, or abandon your fiscal rules. For a while, Labour’s holding line was that they would “go through every pound” in the government’s spending plans to find the money. This was obviously not sustainable in the long term. But it could probably have held for a while longer.

The dilemma for Labour was: announce a new way of paying for these spending commitments and risk the Tories nicking it again and putting them in the same position they started with, or stick to the holding line for as long as possible. Well, now they’ve made their choice, and it’s one we’ve heard from oppositions before: crack down on tax avoidance.²

There are some legitimate questions about the extent to which Labour will be able to raise £5.1 billion per year by the end of the next parliament through cracking down on tax avoidance, although Labour has done its best to make its plan look robust, with a 15-page briefing setting out how it works.³ But it’s worth bearing in mind that as an actual set of policies, it will not actually succeed or fail at raising the money it aims to raise until it is implemented, and that will only happen if Labour actually wins the election it is designed to help win. If Labour wins the next election and its tax avoidance crackdown raises less than £5.1 billion, that will not be the reason it loses the following election.⁴ It is an election issue now, and for now this is what it looks like in electoral terms:

For now, the Conservatives have three choices: knock it down, steal it or ignore it. Knocking it down is quite hard, because Labour can keep asserting its number and pointing at footnotes, and because knocking it down can look like defending tax dodgers. It is quite possible that the Conservatives will steal the policy, or at least announce something similar enough that it no longer works as a Labour revenue-raiser. It’s not straightforward for them to do this, because that involves an acknowledgement that they’ve been leaving £5.1 billion on the table - but if they changed their minds on non-doms they can change their minds on this. Labour are certainly concerned that this might happen.

But Labour clearly wanted to get out on the front foot on this, because if attack is the best form of defence, then defence is a necessary preparation for attack. Labour wants to talk about the Tories’ National Insurance plan, and the fact that it involves a commitment to spend £46 billion over an unspecified timescale from an unspecified source.

The Tories want to talk about it too - just look at these quotes from the Prime Minister and the Chancellor in a press release on this month’s cut in National Insurance:

Prime Minister Rishi Sunak said:

“Hard work is one of my core values, and the progress we have made on the economy means we can reward work with a tax cut worth £900 for the average earner.

“This marks the next step in our plan to end the unfairness of double taxation of work by abolishing National Insurance in the long term.”

Chancellor of the Exchequer, Jeremy Hunt, said:

“The record tax cuts taking effect tomorrow show our economic plan is working – because of the progress we’ve made we’re putting hundreds of pounds a year back into the pockets of working people across the country.

“It shows we stand behind those who work hard and fires the starting gun on our long-term ambition to end the unfair double tax on work.”⁵

Labour absolutely loves that the Conservatives are leaning into this. As I wrote in a post last month, so far as Labour is concerned it is an unfunded spending commitment, it creates a threat of as-yet unidentified cuts or tax rises to voters, it gives them an excuse to associate economically irresponsible Rishi Sunak with economically irresponsible (and totemically unpopular) Liz Truss, and it demonstrates that the Conservatives do not have a plan. Labour’s move to specify how it is funding its policies is a necessary piece of defensive work against the counterattack “You have unfunded spending commitments too”⁶ that gives them the ability to keep talking about the Tories’ £46 billion.

Labour’s priority is to set out their key electoral dividing line: that their plans are fully funded and fully costed, whereas the Tories are proposing an insane £46 billion splurge. And they can’t set that out fully without making sure that their plans are indeed fully funded and fully costed, and that if the funding is taken away by the Chancellor they’ll find another source of funding. That’s the basic reason for announcing this now rather than waiting for it later. It lays the groundwork for their economic attack.

Labour isn’t announcing how it’s going to replace its non-dom policy just because Jeremy Hunt nicked Labour’s non-dom policy. It’s announcing how it’s going to replace its non-dom policy because Jeremy Hunt says he wants to abolish National Insurance, but hasn’t got a plan to do it.

1. That isn’t to say that government spending isn’t constrained - of course it is. It’s to say that opposition and government spending are constrained in different ways. Oppositions have to operate from a baseline the government sets, because the government is raising real taxes and spending real money, and the opposition’s room for manoeuvre is whatever the gap is between what the government is actually doing and what the opposition say they will do. This gap can change whenever the Chancellor wants it to. So if Rachel Reeves as Shadow Chancellor says that she will, say, raise the basic rate of income tax by 5p, she can then say that she will spend the resulting £30 billion or so on, I don’t know, buying every single person in the country a new Xbox, every year. (It’s day-to-day spending so it recurs every year. Good luck trying to resell your Xbox when everyone in the country keeps piling up new ones. On reflection I think this is a bad policy.) But if Jeremy Hunt as Chancellor says that he will raise the basic rate of income tax by 5p, and spend the £30 billion on doubling teachers’ pay, then the baseline changes: Rachel Reeves now has no money to buy everyone a new XBox every year unless she puts another 5p on income tax or halves the new rate of teachers’ pay, which many people would agree would be an example of Labour economic irresponsibility that shows they haven’t changed from the bad old days when Gordon Brown sold all the Gameboys. Of course, this brief illustration does not comprehensively set out the political, economic, labour market and supply chain constraints that prevent either Rachel Reeves buying everyone a new Xbox or Jeremy Hunt doubling teachers’ pay, but you can work the rest of them out yourself.

2. By the way, Labour’s original non-dom plan was earmarked by Labour as raising £2.3 billion a year - which paid for a series of spending commitments that are once again covered by the new plan. But the new plan is supposed to raise, by the end of the next parliament, £5.1 billion, plus a bit more from some other measures Labour has announced to close what it says are loopholes in the Government’s non-doms announcement. That leaves about £3 billion unallocated, in a world in which Labour may well want to make additional election pledges, but in which Rachel Reeves has been very clear that she will not announce any unfunded policies. The Tories may still nick this plan. Nothing is fixed. But watch this space.

3. Never underestimate the value of footnotes.

4. If Labour wins the next election it might well lose the following election, for a whole host of reasons. Parties lose elections, and especially the Labour Party. But I am happy to go out on a limb here and say that there is no plausible scenario in which Labour loses the 2028/9 election and in which anyone thinks that a failure of an anti-tax avoidance programme to raise £5.1 billion by the end of that parliament is the reason, or even one of the top ten reasons, why it lost.

5. Double tax? Come off it. You only noticed this massive injustice, what, a month ago.

6. As with all rebuttal, it is not that it stops the Conservatives making the attack: the Tory response, from Treasury Minister Laura Trott, is “After a month of searching for a plan to pay for Labour’s unfunded spending, the shadow chancellor still cannot say how she will fill the enormous black hole in their promises. And that means one thing - more taxes”. It’s that it makes that attack a lot more crap, and it gives Labour spokespeople something robust and confident to say back, rather than “um”.