a day ago
Is the treasury hinting at tax rise wiggle room?
Darren Jones, chief secretary to the Treasury, is a fastidious minister who chooses his words carefully. So I was struck by what he said Monday morning about the pledges on tax his party made in its 2024 election manifesto.
He said the promise meant: 'Not increasing the headline rate of income tax or employee national insurance and not to increase the headline rate of VAT. That was a very clear promise coming into the election.'
The thing is that's not what the manifesto says. These are its words:
'Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.'
As you can read, the only reference to 'rates' is in respect of income tax. In relation to national insurance (NI) and VAT, the manifesto just says those taxes won't be increased.
Now I won't rehearse again whether Labour breached its manifesto pledge by pushing up employers' NI (though the just-exited head of the IFS, Paul Johnson, says in the latest Rest is Money podcast that the hike in employers' NI was a blatant manifesto breach).
I am interested in Jones talking about not increasing the 'headline rate of VAT'. That is because he may have inadvertently opened a window on Treasury thinking about how to raise perhaps £20bn or so in the autumn budget that may be needed to fill a hole in the public finances, to restore Reeves's fiscal rules headroom.
The question is what Jones means by the 'headline rate'. Does he just mean the 20% most of us are conscious of because it applies to so many items, or is he also referring to the 0% on food and the 5% on energy (there are also other lesser categories where the rates are 5% or nil)?
The point is that the chancellor could cut the main rate of VAT to, say 18%, and raise that kind of money by eliminating the vast categories of our spending that incur nil or 5% VAT.
To be clear, the politics for Starmer and Reeves of putting up the price of food and energy when living standards remain squeezed would be difficult. It would seem to contradict Labour's manifesto promise not to put up costs for 'working people'.
But it is striking that Jones' words were about the headline rate (singular) of VAT, rather than ruling out an increase in the scope and burden. He also made the distinction that Labour's working people's pledge in the manifesto relates to 'payslips', not indirect taxes like VAT.
All of which means such a VAT rise is in play, unless and until Jones, Reeves, or Starmer tell us otherwise.
