The new British government has started its term on the wrong foot, with accusations of receiving gifts from a major party donor. But now all eyes are on the enormous effort that the country will have to make to avoid a raging deficit. This is why tension continues to grow as one of the most important budgets in the country’s recent history approaches. On October 30, on Halloween night, Downing Street will broadcast one of the biggest scares to hit the markets and news in the United Kingdom: a historic tax rise, which analysts say will reach £20 billion balance the books and revitalize the economy.
The general opinion leaves no doubt: the former conservative government failed miserably because public health is stifled and has gigantic waiting lists; town halls are on the verge of bankruptcy; the roads are full of potholes; trains and buses barely provide the necessary service and at exorbitant prices; and every public service imaginable is running out of steam after 14 years of “conservative” austerity.
Chancellor of the Exchequer Rachel Reeves estimates the hole in the books left by the previous Conservative government was around £20 billion. And the only way to remedy this situation is to inject money equally. But the Treasury does not have enough liquidity and the debt reaches around 100% of GDP, which There is only one option left, a general tax increase, to cover the additional spending.
How to raise 20 billion
The situation is extraordinarily complex for the government because it must face two self-imposed limits. On the one hand, the ultimate goal of budgets is to increase investment in public services. possible spending reductions are very limited. And on the other hand, the Government is engaged in the campaign to do not touch income tax, nor social security contributions paid by workers, nor VAT, nor corporate taxwhich means abandoning the main collection tools all at once.
The first of the problems, the inability to remove the scissors indiscriminately, led Reeves to cut off heating assistance to retirees who are not economically vulnerable. An unpopular decision which entailed a strong political cost from the start. Furthermore, it has crippled plans to invest in transport infrastructure, which is precisely what Labor criticized when former Prime Minister Rishi Sunak canceled the high-speed train line between London and Manchester.
But these reductions are far from covering the 20 billion which, according to estimates from the Institute of Fiscal Studies, will have to be mobilized. And, once the main taxes are ruled out, what options remain?
According to the Resolution Foundation, the best way to obtain this amount would be to combine remove inheritance tax exemptionsincrease capital gains tax and force entrepreneurs to contribute to Social Security on the payments they make to their employees’ retirement planswhich until now have been exempt. This latest increase, alone, could mean an increase in revenue of 16 billion, according to consultancy LCP.
Rumors multiplied following an interview on Sky News with Jonathan Reynolds, Secretary of State for Business and Commerce. During this debate, the Labor Party responded, when asked about this possibility, that it would not incur any contradiction with its election promise not to increase taxes on workers. “They knew that this promise was for workers, not businessesit was specifically written in the program,” the senior official said.
The possibility gained even more veracity when it was published by Bloomberg, claiming that Reeves was investigating the possibility. And when Keir Starmer himself was asked about an increase in contributions, the Prime Minister insisted: “Labour’s commitment is not to increase taxes on workers”, which was interpreted as an insinuation that this is one of the measures under study. . If put into practice, it would virtually eliminate most of the tax increase.
Another government objective is the gaming sector. All major British parties have for years threatened to toughen their stance towards the big betting companies, which constitute a historic institution in the United Kingdom. But the “boom” of Internet sports betting has exploded their reach, their revenues and the social damage they cause.
British media reported that Reeves would consider a big increase in taxes on these companies, worth £3 billion. A possibility that caused falls up to 16% on the stock market large companies in the sector, such as Ladbrokes or William Hill. According to analysts at Jefferies, an increase to this level is “impractical” because it would “virtually wipe out the profits” of these companies. But investors appear to be taking the issue seriously.
Although, of course, the most likely area where new avenues of funding for the UK could be found is that of the withdrawal of tax exemption for the rich in the United Kingdom. A more than 225-year-old law that allowed those who spend most of the year outside the UK to avoid paying tax is in the eye of the storm. 74,000 people are using this legislation and Starmer has already threatened to scrap it.
Hard blow for businesses… but few alternatives
Beyond the impact which, it was said in September, could have higher incomes on the highest incomes in the country, with an exodus of fortunes to other countries, analysts see that this whole cascade of possible taxes could have an even more dangerous implication: a paralysis of investments and decisions of the country’s businesses. Especially when it comes to hiring workers.
Ben Jones, senior economist at the CBI, explained in a recent report that Companies “suspend” their hiring At the same time, most of them are postponing their investment decisions until they clearly see the impact that the new budget can have on their business. “The country’s businesses need to have more clarity on the direction of the new government’s economic policies.” Jones went on to say that “our surveys suggest businesses may have hit the brakes again in September amid speculation about possible budget announcements.”
This was particularly noted in UK business confidence datapublished a week ago by the British Chamber of Commerce. According to the publication, doubts about the Labor government’s budget were the main explanation given in the survey to explain the drop in this ratio. “Many businesses are increasingly concerned about the direction of economic policy, and taxation has become their primary concern,” said research director David Bharier.
From the consulting firm RSM they point out that “winter is coming for taxpayersand not just for those who have had their fuel tax breaks removed. » Chris Etherington, an analyst at the firm, comments that “those who expect a tax increase to only affect the wealthiest in society will likely be very disappointed. “
Regardless, RSM emphasizes that there is no other option than to endure the increases in these taxes. “If the Chancellor of the Exchequer cannot raise the desired tax revenues from only the richest taxpayers and does not increase them directly by increasing tax rates on workers, there are few options left to bear the burden of budget deficit.”
Sanjay Raja, analyst at Deutsche Bank, points out that This, although difficult, is the best path the UK can take given its circumstances.. “The other option is large waves of debt which are not without risk.” In this sense, he underlines that, even if Downing Street wishes to take another path, there are not as many alternatives as it seems. “The UK government must play by its fiscal rules and cannot go into debt to finance its current spending, which has soared.” According to the Institute for Fiscal Studies, the government needs tens of billions of pounds just for public sector pay deals and to avoid spending cuts.
In addition, Capital Economics explains that higher taxes, if it is not clear how they will be organized, could affect the economy at a particularly difficult time. “Our opinion is that GDP growth will be slower in the second half than in the first, but a major slowdown or new recession will be avoided“, comments Paul Dales, analyst at the firm. In any case, lower interest rates will allow greater growth despite higher taxes. For the moment, the IMF’s outlook speaks of an increase in its GDP by 0.7% in 2024 and 1.5% in 2025.
