91探花

Rachel Reeves may fancy her chances on the Great British Bake Off in the future. The coming days are a technical challenge like no other and rarely has a Chancellor had so few ingredients available to bake a Budget.

There are breadcrumbs we can follow though, there appears to be a laser focus that any tax announcements have to improve the Treasury’s finances. The theme of pragmatism over ideology is also a recurring one in recent weeks and there will be limited appetite for a misstep in No 10. That all points to tax policy changes which are simple, tried and tested, and difficult to avoid. 

Those expecting the Chancellor to use her first Budget as a platform for a dramatic reshaping of tax rules are likely to be sorely disappointed. The Chancellor will not see this as a time for grandstanding and etching herself into the political annals as a great tax reformer. There is plenty of time for that. This is about the cold-hearted business of balancing the books. 

As a result of the manifesto commitments, there appear to be only three routes for the Chancellor to pursue in raising tax revenues further and Rachel Reeves will need to draw on the SAS. Not the special forces, although the Chancellor might welcome their support in defending the difficult decisions expected to be announced, the SAS in this case is a combination of stealth taxes, additional taxes and smaller taxes.

More taxpayers are now familiar with the concept of stealth taxes, with many having felt the effects of fiscal drag first-hand following the lowering and freezing of various tax thresholds and allowances by the previous government. Given the self-imposed restraints placed on the Chancellor, there will be a strong temptation to raise taxes by the backdoor in a way that is not widely understood by the general public, but arguably does not breach a manifesto commitment. 

Employers' National Insurance contributions (NICs) changes may effectively reverse her predecessor’s employee and self-employed NICs giveaways that Rachel Reeves criticised at the time. The economic burden of such a rise will undoubtedly fall on workers but semantics matter in politics. 

The Chancellor will be reluctant to copy the Conservative’s playbook on fiscal drag and prolong the freezing of thresholds but could feel forced to. The benefit of doing so may not be as great however, and therefore not worth the political cost, given the lower inflationary environment that we will hopefully remain in for the rest of the parliament.

Turning then to the idea of additional taxes, the Chancellor has already ruled out a new wealth tax, and practicalities and political risk may rule out other potential new taxes at this stage. The announcement of the election earlier this year took many by surprise and it is difficult to see how the Chancellor would have had the time to fully work through the design of a brand new tax. A new tax also comes with significant political risk if it were introduced without consultation, and the new government will be keen to avoid any measures that could backfire.

That then leaves us with the final option which has dominated the conversation over the last few months, namely, which smaller taxes are set for a makeover. We’ll undoubtedly see changes to capital gains tax and perhaps some smaller changes to inheritance tax. If you are guided by tax revenues, rather than fairness, then the options appear to be quite limited.

The Chancellor is likely to be keen to stay on the path more well-trodden in this Budget rather than make lots of changes to smaller taxes that have questionable outcomes. The top 1% of society will certainly pick up a part of the tab but the uncomfortable truth for the Chancellor is that the Britain she is building comes with a bill that we all have to share.