Labour’s Tax Policy Tightrope: Ruling Out VAT Increases Amid Fiscal Challenges and Campaign Pressures

Whether or not to adjust VAT, Labour must maintain a consistent stance on taxation

Independent experts deem the public spending plans for the coming years as nearly unmanageable, and Rachel Reeves has complicated her role by dismissing alterations to VAT.

Assistant political editor @SamCoatesSky

Thursday, May 30, 2024, 8:

The announcement regarding the shift in Labour's tax strategy was released just after 9pm on Wednesday evening, a timing that was far from optimal for introducing such a significant policy alteration during the campaign.

The outcome is that a possible future Labour administration may have significantly complicated its own situation should financial constraints arise, by limiting its choices in an effort to prioritize caution and minimize risks.

A lot has happened in a brief period.

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During her appearance on the BBC this past Sunday, Labour's shadow chancellor Rachel Reeves stated that the party does not plan to increase income tax or national insurance during the upcoming parliamentary term, should they emerge victorious in the next general election.

On Tuesday, the shadow chancellor informed me that there would be no increases in income tax, national insurance, or corporation tax in the upcoming parliamentary session.

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On Wednesday, Darren Jones, her deputy and the shadow chief secretary to the Treasury, affirmed that these three taxes would not be subject to hikes.

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Mr. Jones emphasized that there are currently "no plans" to raise additional taxes beyond those previously declared, yet this vague "no plans" phrase does not serve as a solid assurance.

When a party moves from being the Opposition to governing, their strategies often evolve, especially if they discover unexpected deficits. In this scenario, only three taxes were guaranteed to remain unchanged.

However, this stance posed a challenge.

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Experts believed that Ms. Reeves had maintained considerable flexibility after she dismissed the possibility of raising income tax, national insurance, or corporation tax.

A likely move for a potential Chancellor Reeves, if she were in urgent need of substantial funds, would be to increase VAT, which is one of the three major taxes generating over £70 billion annually.

While there are no indications that Labour intends to implement an unexpected increase in the main tax rate, similar to what former chancellor George Osborne did when he assumed office in 2010, various minor adjustments to tax rules and exemptions could potentially generate significant revenue.

Questions intensified, along with political pressure, leading to a Conservative-led advertising campaign dubbed the "tax bomb," which centered on their rivals' refusal to dismiss potential increases in VAT.

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On Wednesday afternoon, inquiries were made to Labour regarding the Conservative campaign. Later in the evening, they released a statement pledging that there would be no hikes in VAT taxes.

The party asserts that their lack of original intentions to increase VAT means this change is not significant.

However, by aligning their stance on VAT with that of the Conservatives and Liberal Democrats, they have essentially made it very difficult to make any adjustments to this tax in the upcoming legislative session.

Labour could find itself in need of additional funds due to a variety of factors including large, unsettled compensation programs such as the one related to the infected blood incident, failing local governments, and efforts to settle ongoing public sector strikes, all of which carry hefty price tags.

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Currently, independent experts, including the International Monetary Fund (IMF), have deemed the trajectory of government expenditures over the coming years as virtually unsustainable.

However, Labour has established stringent borrowing guidelines, closely mirroring those of the Conservatives, which makes it challenging to finance initiatives by significantly raising debt. This situation necessitates relying on taxes – how much more difficult has Reeves made her task?

Concerns are growing that Labour was caught off guard. However, the party refutes this, claiming they had foreseen such developments from the start.

However, to project a sense of stability and meticulousness—a stark contrast to the existing Tory administration—requires steady, not last-minute, alterations to policy.

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