How is it possible for senior politicians to miss a £22bn black hole in the nation’s finances they were repeatedly told about months before the general election?
If Rachel Reeves, the new Chancellor of the Exchequer, has a satisfactory answer to this question, we have yet to hear it.
The frightening thing is that significant changes to the UK’s taxation system, probably including both CGT and IHT, are likely when Reeves makes her Budget statement as part of the Autumn spending review on 30 October. Yet they are based on politicians lying to us.
At the end of July, the Chancellor stood up in the House of Commons and, like Captain Renault in Casablanca, professed herself “shocked, shocked” at the £21.9bn financial shortfall she claimed to have discovered only after Labour’s election victory a few weeks earlier.
Yet anyone following the increasingly desperate press releases from the Institute for Fiscal Studies (IFS) in recent months, asking politicians from both sides to be more honest about the state of the UK economy, knew there was a £20bn gap between tax revenues and expected outgoings, no matter who won the election.
No one comes out of it with any credit. Jeremy Hunt, the former Chancellor, gave away £20bn in two successive rounds of National Insurance cuts, from 12% to 8% in November 2023 and March 2024, with no idea of how he was going to recoup the money.
Hunt then attacked his successor for agreeing 5.5% pay rises for teachers and NHS workers, as recommended by their independent review bodies (PRBs), knowing he had only set side 2% for any increase this year. Both PRB recommendations had been delivered to their respective ministers’ departments before the election was even called.
Hunt knew that refusing to honour the PRB recommendations would have led to many months of strikes by nurses and teachers, which would have rebounded on the government.
Labour knew this, which makes its pretence to be surprised by what they found once elected a painful charade
The former Chancellor also knew the Home Office budget was covering up an annual £6.4bn hole by paying for the accommodation of asylum seekers out of its reserves, thereby preventing the Office for Budget Responsibility from carrying out meaningful spending forecasts.
Labour knew this too, however, which makes its pretence to be completely surprised by what they found once elected a painful charade. The Home Office affairs select committee has repeatedly drawn attention to this fact.
When Labour leader Keir Starmer was asked in late June about the IFS predictions of a tax shortfall, he told Sky News: “I don’t actually agree with these forecasts, that are premised on the basis that we cannot grow the economy.”
Did he really imagine rocket boosters would power the economy forward within minutes of Labour’s victory, thereby permitting spending increases beyond Reeves’ incredibly limited promises?
To be clear, I’m not disputing the need to raise taxes: public services are broken and it will be impossible to get them back on their feet without such increases.
From the perspective of advisers, any changes to the taxation system are an opportunity to speak with their clients, so this is not entirely bad news for Money Marketing readers either.
Complex issues regarding tax policies affecting millions of people are reduced to simplistic statements by politicians
Technical Connection managing director Tony Wickenden wrote an excellent analysis of the options available to Rachel Reeves earlier in August, and I’m sure there will be acres of additional space devoted to the subject in weeks to come.
But what does worry me – and should concern Money Marketing readers – is the way complex issues regarding tax policies affecting tens of millions of people are reduced to simplistic statements by politicians.
Stopping the Winter Fuel Payments (WFP) for pensioners means tens of thousands of older people face a financial cliff-edge purely because they are few hundred pounds outside the pension credit threshold.
Meanwhile, an estimated 850,000 older people are also eligible for pension credit, but do not claim it. Barring them from accessing WFP isn’t just a “difficult decision”, as Reeves would have it, but a cruel one.
This isn’t how you run a modern taxation system.
Nic Cicutti can be contacted at: nic@inspiredmoney.co.uk
£22 billion ….
To be honest Nic, I’m surprised its not more !!
Look back over the last 5/6 years Covid, Brexit, Energy, wars … the list is not exhaustive
At times it was not about keeping our heads above water… it was get on Amazon and buy snorkels !!
There is no denying our tax system is a bit buggered, and the convenient use of Charities to raise funds plugging the gap in some areas which go underfunded funded by our government (whichever colour hat they wear ..) is ..well quite abhorrent
Should there really be charities for our Elderly, Military, Health, Homeless, Children ….? there are more ..
Like most things our political system has gone stale …neigh gone green with mold, decades of rinse and repeat !!
£22 billion now, the question we should all ask ourselves, what is it likely to be in 3 or 4 years ?
Wide ranging but full of good comment…
I have said MM passim recently… we are headed back to about 1977… about two half years later it was the Winter of discontent… and the rise of monetaristism and individualism… and, much favoured by the unions, collective bargaining…
Reeves seems confused between her paymasters and individual no more taxation – VAT, Income, NI – if you largely fall into the former as well… most people I know are ‘working people’ though not, perhaps, in the same context as viewed by RR.
The above is important as it shows the power of organized collectives of otherwise disparate scattered souls, i.e. unions, and one of the last remaining Guilds – BMA. Collective power is something which, thus far, has eluded the advice industry in UK – when was the last time CII critisised the FCA?
Greedy and yoked politicians always seek the popular choices – what better than, essentially, capital? After all, it is assets which have rocketed ever since Osborne backed assets over people and wages – QE – back in 2011 on…
The advice industry is focused upon the more well off – quite sensibly so as this makes up for its weak structure – it has advised as assets have risen… now it can advise when those same are facing attack from the desperate to be non ‘class traitors’!!
So! I ask,, if 800,000 “older people” claimed thier entitlement to Pension Credit, which they should be doing so, and as such became eligible for the Winter Fuel Allowance “again”, how much would this pathetic government be saving!!! plus the additional cost of its supervision by civil servants. Also I wonder how many of these people who should be claiming, voted Labour!!
Thinking about it, surely the best way of dealing with this would have been to Tax the Winter Fuel Allowance as “income”. Much more benifical and easier to administrate by HMRC.!!!!!
Dear Nic
I’m sure you are more than well aware of how pathetic our politicians are. So, we are in a financial hole and what does this government do? Spray money around as if it was Christmas. (Not that the other lot was any better). Yes, the PRBs make recommendations, but they don’t have regard to the wider economic picture. How much do you pity a train driver on £60k? If they are considering driverless cars how much easier would it be to develop driverless trains – after all they run on rails. It would be just a glorified Hornby set. It will get worse. We have a government that is committed to its green agenda – which is costly. (They expect us to pay for expensive EVs, Thermal Heaters, Insulation and pay a heavy charge for our current energy. We have huge reserves of oil and gas which they are happy to just leave un-utilised. Yes, we have climate change, but if others reached our standard, the problem would be much less. Why should we be exemplars and bankrupt ourselves? When will we reap the benefits of wind and solar energy? We have to increase our defence spending. We need more prisons, hospitals and schools – and so it goes on. Does this government have a magic money tree?
Harry you are bang on ..
If our politicians fail to get the basics right, everything following or adding will inevitably fail.
You high light a train Driver on a £60k a year salary …..
One may first think …nice, quite high, do they deserve pity ?
But in reality is it, and yes they do …
My view its is still “low” in todays economy…
To buy a house 3x salary …they are looking at a £180k mortgage …presuming they have saved a modest 10% deposit.
Yes you could get a reasonable house in the Outer Hebrides…. bloody long walk to work !!
Having a general chat with a client the other day … he quoted
“are you worried about the rise in Artificial Intelligence (AI), not in the least, but I’m shit scared of the fall in real intelligence”
So there you have it !!
Sorry off topic a bit …but its all about doing the simple things right.