Rachel Reeves has admitted her tax-grabbing Budget will hit the pay packets of working people as the Institute for Fiscal Studies (IFS) accused her of undermining trust in politicians.
The chancellor was forced to accept that her decision to hike employers’ national insurance contributions would lead to workers being paid less.
But, in a damning assessment of Ms Reeves’ claims to have protected workers in Wednesday’s Budget, IFS director Paul Johnson said she risked “further undermining trust”.
“How the Budget red book can include the sentence ‘the government is not increasing the basic, higher or additional rates of income tax, National Insurance contributions or VAT’ is beyond me,” Mr Johnson said.
Labour’s general election manifesto promised not to raise the taxes in a bid to protect “working people”, which a series of ministers and Sir Keir Starmer went on to struggle to define.
But, on Wednesday, Ms Reeves hiked employers’ national insurance contributions from 13.8 per cent to 15 per cent, something she argued does not breach the commitment because it does not show up on employees’ payslips.
Mr Johnson on Thursday said: “The continued pretence that these changes will not affect working people risks further undermining trust.”
The Office for Budget Responsibility estimates that, by 2027, 76 per cent of the costs of the additional tax will be passed on to workers through lower wages.
Joining Mr Johnson, Resolution Foundation boss Mike Brewer said the levy is “clearly a tax on working people”.
He added: “This will definitely show up in wages, this is definitely a tax on working people, let’s be very clear about that.” Adding to the pressure on Ms Reeves, the Resolution Foundation found that by 2028, real weekly wages will have grown on average by just £13 in the past two decades.
And, quizzed about her national insurance hike on BBC Radio 4’s Today programme, Ms Reeves said: “Yes, this will have an impact on wage growth… what alternative was there?
Ms Reeves added: “We faced a £22bn hole in the public finances… we had to increase taxes yesterday.
“I did not want to increase the key taxes that working people pay: Income tax, VAT and employee national insurance. So we have increased national insurance on employers.”
It came after Ms Reeves used Labour’s first Budget in 14 years to push a £40bn tax hike and £32bn borrowing spree in what she said was a plan to “fix broken Britain”.
She announced a string of measures targeting the wealthy and the middle class, including:
- Employers’ national insurance contributions to rise from 13.8 per cent to 15 per cent
- Capital gains tax increased from 10 per cent to 18 per cent
- Non-dom status abolished and replaced with a residency tax
- Inheritance tax expanded to include pensions and farms
- Stamp duty raised to 5 per cent for existing homeowners
Ms Reeves said the tax rises will help to pay for an extra £25bn cash injection for the NHS, part of an overall spending increase of £70bn.
Tax experts warned Ms Reeves’ inheritance tax shake-up could leave some paying an effective tax rate of 67 per cent on inherited pensions. Rachel McEleney, associate tax director at Deloitte, said that recipients of inheritance could have to pay 40 per cent on funds received from pensions, before being charged income tax at 45 per cent on the remainder, giving rise to an effective 67 per cent tax rate on taxable pension death benefits.
In its widely anticipated reaction to the Budget, the IFS said Britain was now in “the decade of higher taxes”.
“The state has grown, and it seems unlikely to shrink again anytime soon,” Mr Johnson said.
And, warning of further tax rises to come, the top economist warned Ms Reeves’ current spending plans look “almost as implausible” as her predecessor Jeremy Hunt’s.
Spending is set to rise by 4.3 per cent this year and 2.6 per cent next year, but then by just 1.3 per cent each year after.
“I am willing to bet a substantial sum that day-to-day public service spending will in fact increase more quickly than supposedly planned after next year,” Mr Johnson said, adding that further tax rises would likely be needed.
Sir Keir’s spokesman rejected the suggestion taxes will have to be raised again in two years, adding that Ms Reeves had “set out the spending envelope over the course of this Parliament and it results in day-to-day funding growing an average of 2 per cent per year”.
“Rachel Reeves was faced with a genuinely difficult inheritance and the last government must take a lot of the responsibility,” he said.
But while accepting the tricky situation for the chancellor, Mr Johnson lashed out at her lack of willingness to pursue major tax changes elsewhere.
He said: “The lack of any apparent strategy or appetite for reform is deeply disappointing.
“That the chancellor decided to increase stamp duty, if only on second properties, is most disappointing of all.
“The failure to increase rates of fuel duties in line with inflation, and pretend that it will rise in the future, continues the absurd behaviour of chancellors past.”
And Mr Johnson said if the government wants to boost growth it must introduce “a much more coherent tax strategy than we saw yesterday”.
“Let’s hope for better next year,” he said.
Mr Hunt, who is standing down as shadow chancellor and will spend the coming years on the backbenches, appeared to suggest that Ms Reeves’ Budget was even worse than Liz Truss’ mini Budget or any other in the last five decades.
But despite criticism, Labour received a Budget boost as the International Monetary Fund (IMF) welcomed the measures announced by Ms Reeves.
In a rare intervention from the influential financial watchdog, it backed the increase in investment and spending to ease pressure on public services as well as the government’s “sustainable” tax rises.
“We support the envisaged reduction in the deficit over the medium term, including by sustainably raising revenue,” an IMF spokesperson said.