Sir Keir Starmer’s cabinet is deeply divided over economic policy, with senior ministers fearful further measures to target the rich in next month’s Budget could accelerate the wealth exodus from Britain.
Cabinet ministers have told the The Independent they believe Rachel Reeves has already gone too far with measures targeting the wealthy and businesses, and have urged the chancellor to change course if she is to have any hope of achieving growth.
They cited “anti-aspiration” measures such as the abolition of non-dom status and VAT on private school fees as key drivers of wealth away from the UK, saying they are “harming this country”. Further measures reportedly being considered include a property tax on high-value homes and a new bank profits tax.
Ministers have instead urged the prime minister and Ms Reeves to consider “efficiency savings” and cuts to fill a Budget black hole estimated to be between £30bn and £40bn.
Those on the left in Labour have noted that the recent reshuffle has “handed more power to the right of the party” while left-wingers who support wealth taxes have been demoted or pushed out.
But a powerful group within cabinet on the right of the party believes the government is failing to rein in spending and needs to be more ready “to reform the state in a Labour way.”
One minister said: “The trouble is we have crossed a line in trying to encourage aspiration. The non-dom change and the VAT on school fees have sent the opposite message.”
Noting the record number of millionaires leaving London in particular, the minister added: “It’s doing a lot of harm to the country.”
Another cabinet minister said: “I just think the non-dom changes made no real sense. Why do we want people with money to move it out of the country? It is really bad for London.”
Ms Reeves is currently refusing to budge on the manifesto promise not to raise VAT, income tax or employee national insurance contributions, but is facing mounting pressure is mounting there too.
However, one of her firmest allies in sticking to this pledge is new welfare secretary Pat McFadden, who has warned colleagues that “election wins are hard to come by and that manifesto promise was key to achieving it”.
He is in charge of trying to revive welfare reform after the government’s plans to slash disability payments were derailed by a massive rebellion by Labour MPs before the summer.
However, there is another faction within the cabinet that is backing growing calls from unions and Labour members for wealth taxes to plug the hole in the nation’s finances, such as a property tax that would hit those who have high-value homes.
There are others who are supporting the TUC’s campaign for a new bank profits tax and to hit the super-rich with a wealth tax.
One minister said: “It only seems fair that the rich carry the burden.”
However, question marks have been raised over whether so-called wealth taxes can fill the Budget black hole or would do more damage.
Professor Stephen Millard, deputy director of the National Institute of Economic and Social Research (NIESR), has warned that Ms Reeves will eventually have to break her manifesto promise not to raise any of the big taxes – VAT, income tax or employee national insurance contributions.
The NIESR estimates that the black hole will be above £40bn, and Prof Millard warned: “It is likely that, absent any change in policy, the chancellor will have a large gap to fill to meet her fiscal rules; a reduction in spending would be hard to achieve given we’ve just had a comprehensive spending review.
“It is likely that any change to the rules enabling the chancellor to increase borrowing would result in an adverse market reaction; so the chancellor will need to raise taxes.
“Given our estimate of the extent of the gap, we do not think that the Chancellor will be able to fill it by ‘tinkering’ with lots of changes to the non big four taxes; so we think she will have to raise either income tax, NICs or VAT.”
Isaac Delestre, senior research economist at the Institute for Fiscal Studies (IFS), warned: “If the Office for Budget Responsibility (OBR) forecast deteriorates and the chancellor wants to stick to her fiscal rules she will either need to deliver spending reductions or tax increases.”
