There’s an alternate reality, where Rachel Reeves and Sir Keir Starmer spent the last three months talking up Britain’s prospects and claimed the credit for reducing inflation, an interest rate cut and a recovering economy.
Nurturing the national mood of optimism that came with a change of government and capitalising on the economy improving, they then delivered an Autumn Budget anchored around fixing the mess in Britain’s tax system.
This could have been promoted as a kickstart to productivity and a key pillar of supporting Britain’s growth agenda.
Perhaps in that budget some tax rates had to rise a little – after all we need to balance the UK’s books – but we could be sold slightly higher rates as the trade-off for a reinvigorated, fairer tax system.
Cheer up: In an alternate reality, Sir Keir Starmer and Rachel Reeves set out a very different stall for the forthcoming budget – one based on optimism
The blank slate approach could have involved ending the 60 per cent tax trap, removing cliff edges on child benefit and childcare, revising outdated inheritance tax allowances, raising capital gains tax a bit but reintroducing indexation, and a guarantee that from now on tax thresholds would rise with inflation.
All these moves would be entirely sensible and could be framed as a foundation for improving productivity to bring decades of future growth.
A blend of positive sentiment and Rachel Reeves setting out her stall on improving the tax system for the better would allow for a tweak to the Chancellor’s fiscal rules to support investment.
The overarching message, you elected us on a mandate of growth and we can’t tax our way into that, so we will sensibly speculate to accumulate and set up Britain to succeed.
Mystifyingly, Starmer and Reeves decided their first 100 days and budget plan would look very different to this parallel universe.
Instead of much-needed optimism they have delivered miserabilism.
The decision to go big on the ‘£22billion black hole’ and ‘painful budget’ rhetoric as early as the 29th of July, has led to months of speculation on spending cuts and tax hikes.
The Prime Minister and Chancellor appear to have been on a mission to eradicate all the good cheer that existed on the morning after the General Election.
I’ve had numerous conversations over the past few months with business leaders and professional investors who are absolutely baffled by this approach.
I’m sure Reeves and Starmer had a good reason for it, but whatever that was it has been buried under a mountain of negativity.
It’s managed to get blamed for the biggest crash in consumer confidence since Russia invaded Ukraine. Meanwhile, you can take a rough measure of the effect by looking at how much of their post-election bounce, UK-focussed investment trusts and funds have given back.
Delaying the budget until the economic news looked better and the dust had settled on the election made sense, scaring people while we waited did not.
Tax promise: Labour made a pledge in its manifesto not to raise national insurance rates
The extended timespan ahead of the Autumn Budget has not only allowed for every conceivable tax rise to be floated but also for most of them to be shot down, as either not worth it, impractical, or causing knock-on problems elsewhere.
Scraping the barrel, we now find the prospect bandied about of possibly one of the worse ways of raising more tax revenue, a hike in employer national insurance contributions and potentially seeing NI imposed on employer pension contributions.
This would be a tax on jobs, impede hiring and pay rises, and potentially dent pension contributions. It’s not a pro-growth policy.
If you squint hard enough, hiking employer NI might just fit with Labour’s promise not to raise taxes on working people, but ultimately workers will pay the price.
Meanwhile, I’m certain it doesn’t square with the clear statement in the Labour manifesto: ’we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT’.
Labour’s big mistake was painting itself into a corner with that daft promise on the main taxes that together make up about three quarters of the UK’s tax receipts.
Big earners: This IFS chart shows how income tax, national insurance, VAT and corporation tax makde up most of tax receipts
This was a pledge designed to get the party elected that didn’t properly consider what it would need to do once in power.
So instead of the Chancellor being a new broom that sweeps aside the tax mess the Conservatives left us in, the expectations are Reeves will end up tinkering to raise a bit of revenue and make bad taxes worse.
Of course, that may not happen, we might get a positive budget surprise.
I think that given the headroom to be brave Rachel Reeves has the potential to be a good Chancellor.
She strikes me as a politician who gets it, she has spoken out in opposition against bad policies and I suspect she would quite like to sort the problems in the tax system.
Maybe, the best move would be to get the bad news out the way and simply break the manifesto promise by reversing Jeremy Hunt’s last 2p employee national insurance cut.
The UK couldn’t afford that tax cut and the former Chancellor shouldn’t really have made it. Put NI back up to 10p and we are still 2p better off than we were before Hunt’s first NI cut kicked in at the start of this year to bring it down from 12p.
Reeves could be honest with us, explain that and say that she would hope to cut NI again in the future when we can afford to.