Staring down the fiscal barrel

Speculation is hotting up about what the Autumn budget will bring. It feels like only yesterday we were staring down the barrel of the fear that chancellor Rachel Reeves would raise capital gains tax in line with income tax last year. In the event, of course, her move was modest and even that proved counterproductive with the tax-take falling since the intervention.

This year, she remains in a very similar pickle. Her hopes that last year’s tax rises, principally a rise in employer NI, would prove enough to shore up the exchequer have proved illusory. Of course, we never know, her fiscal headroom pivots around the estimates given to her by the Office for Budget Responsibility and small mechanical changes to future growth and borrowing cost forecasts can have a dramatic bearing on the size of her fiscal shortfall. In the run up to budgets, think tanks are prone to putting out inflated eye-catching numbers.

Yet on the balance of probabilities the hole is big and will need intervention. She remains constrained by her manifesto promise not to raise the headline rates of employee NI, VAT or income tax. The difficulty is of course that this is what the bond market wants to lower the price of UK debt. It would like a big broad tax rise that spreads the burden across a broad enough portion of the population to have faith the tax revenue will actually arrive. This is in contrast to her small, targeted piecemeal taxes which may either raise far less than forecast or impose disproportionate pain on small cohorts of the population.

This week, the Treasury floated the prospect of adding national insurance to rental income payments. It is hard not to see this as desperation. Apart from anything else this looks like a deeply regressive tax for a Labour government. Rent is by definition paid by those who are struggling to get on the housing ladder and this cost can expect to rapidly be passed on to tenants. It sits uneasily with the plans from deputy prime minister Angela Rayner to offer protection to this group of the population. It also of course gets the chancellor nowhere near the number she is likely to raise, and it seems certain there will be other rises. An obvious step is to further freeze income tax bands for longer, but this is unlikely to get her there quickly.

Spending cuts remain possible although the heavy front-loading of spending by the government to remove the severe Covid-era bottleneck in the NHS means that quite a lot of the money she was slated to raise from her first budget is already spent.

All of this leaves us in the position that we can expect some unpleasant and targeted tax rises but also that she is unlikely to grasp the nettle and properly shore up the finances, that would be political suicide.

So, the UK’s fiscal troubles will likely rumble on with a government hoping that it can kick the can down the road for another six to twelve months – in case something happens.