Tax Doubts Look Set to Dog Keir Starmer to Election and Beyond

Tax Doubts Look Set to Dog Keir Starmer to Election and Beyond

Keir Starmer’s path to power at the UK general election seems unassailable with less than three weeks to go, but for investors, economists and the ordinary Britons who will elect him, the Labour Party leader has yet to settle a key question: do his tax and spending plans add up?

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(Bloomberg) — Keir Starmer’s path to power at the UK general election seems unassailable with less than three weeks to go, but for investors, economists and the ordinary Britons who will elect him, the Labour Party leader has yet to settle a key question: do his tax and spending plans add up?

Labour unveiled a manifesto this week setting out a cautious pitch based on economic growth spurred by planning liberalization, energy market reform and £8.6 billion ($10.9 billion) of well-signaled tax rises to help mend Britain’s ailing public services. 

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Halfway through a campaign triggered by Prime Minister Rishi Sunak in a surprise announcement on May 22, voters seem to be buying Labour’s offer after 14 years of Conservative governments defined by political and economic turmoil. Starmer came through this week’s manifesto launch and grillings by TV journalists unscathed, and Bloomberg’s polling composite gave his party a 21.6-point lead over the Tories on Friday, virtually unchanged from three weeks ago, and enough for a clear majority.

Yet some experts responded with skepticism. Paul Johnson of the Institute of Fiscal Studies said Labour was participating in a “conspiracy of silence” over the economic difficulties facing the next government, while former Labour shadow chancellor Ed Balls said Starmer had put the party in a fiscal “straitjacket” by ruling out both austerity and tax rises. 

Bloomberg Economics said the manifesto left questions on government spending “unanswered,” estimating £20 billion needed to be found to fund protected departments and prevent real spending cuts elsewhere.

What Bloomberg Economics Says…

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“More tax rises will be required to keep the fiscal position sustainable and maintain the quality of public services.”

—Dan Hanson, Bloomberg Economics. Click for the INSIGHT.

The economic inheritance for the next government — plus pledges on health, education and defense spending — means other parts of public expenditure, such as prisons, the environment and local administration, look set to be squeezed absent new sources of cash. Many economists — and voters — believe a Labour administration would need to raise taxes by more than Starmer is letting on. 

It’s a theme that’s informed last-gasp Tory efforts to avert a landslide defeat: Treasury minister Laura Trott held a press conference on Friday claiming Labour would raise 18 different taxes. That might be spurious, but even former Labour leader Neil Kinnock told Bloomberg in an interview this week that his party needed wriggle room to raise taxes if needed.

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That misunderstands the evolution in the economic stance of both Starmer and his would-be finance minister Rachel Reeves over the past four years as they sought to turn Labour into an election-winning party, according to people close to them, who like others who spoke to Bloomberg for this story, requested anonymity discussing internal party thinking.  

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The two politicians have moved away from a typical Labour approach of using tax and spend levers to redistribute wealth, toward a more nuanced view of the role of the state, according to the people. Instead — informed by meetings with business leaders — they’ve come to prioritize growth, investment and planning reform as the way to create a more equitable society, the people said. 

“The tax burden is at its highest level in 70 years,” Reeves told Bloomberg at a campaign event this week. “We don’t need higher taxes.” 

Starmer, for his part, decided that a commitment to “wealth creation” should be the top line of the manifesto, one added.

Labour’s new thinking is reflected in the decision to rule out raising taxes on “working people.” Labour has categorically said it won’t raise income tax, the national insurance payroll tax, value-added tax or corporation tax — the Treasury’s four biggest revenue raisers, adding up to about three-quarters of total receipts.

The promise is genuine and will not change, Labour officials said. With the country still feeling the impact of the cost-of-living crisis, Britons are “taxed enough already,” Starmer told Sky News on Wednesday.

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Labour aides concede they would rather try first to find savings in non-protected departments than raise taxes. At least one shadow cabinet team is prepared to take the fight to Reeves to avoid cuts to their department, a person said. 

That doesn’t mean there will be no tax rises. Most Labour aides and lawmakers think some are inevitable, though ideally ones that are focused on unearned wealth and other limited areas. Reeves has previously suggested reforms to capital gains and council taxes. Smaller taxes on vices, carbon emissions, air pollution and narrow areas of wealth seen as excessive could be looked at, some aides said. There’s an open question of whether to do a number of smaller rises that add up to a lot of revenue, or one or two focused on the wealthy, they said.

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Labour is also likely to borrow more if that’s possible within its fiscal rules, officials said. Starmer and Reeves are relaxed about borrowing — mainly to help stimulate flows of private sector money — but also for state-backed investment, they said. 

Some Labour aides are also optimistic interest rate cuts and better-than-expected growth over the next year will cut debt-servicing costs, potentially giving them tens of billions of pounds extra fiscal headroom.

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Labour’s current economic thinking is a far cry from the Starmer and Reeves of only a few years ago. They are previously on record advocating wealth taxes and raising levies on dividends and high earners. Now, they see those policies as more of a threat to growth, which they view as the primary way to increase wages, reduce inequality and raise revenue to spend on public services, the people said.

The new approach portends hard decisions in government, especially early on, which may be difficult for others in Labour to swallow — though Starmer has said there will be no austerity imposed on departmental spending. 

That all points to an outcome that’s a combination of three strategies in the first years of the Starmer project, one person said. They are: tough spending decisions in that fall short of austerity, limited tax rises if necessary, and some more borrowing if possible within the fiscal rules. That’s a difficult balance to strike without upsetting the party and the country. Economic growth is the perceived solution to raising revenue to spend on fixing public services, something that is seen as a longer-term goal. Whether it’s a silver bullet or a distant mirage remains to be seen.

—With assistance from Ellen Milligan.

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