Four ways Labour could raise money in the Budget without hiking income tax

Four ways Labour could raise money in the Budget without hiking income tax

There is likely to be plenty of attention on the chancellor’s “headroom” in this Budget.

That is the financial cushion the government uses to meet its own fiscal rules and cut borrowing.

Economists believe that buffer may have been cut in half over the past six months, from about £24bn to as little as £11bn, partly because of higher interest rates the government has been paying to borrow from private investors.

The Chancellor, John Healey, may have to find extra money to rebuild it, which would indicate the government’s plan to bring borrowing down by the end of this Parliament remains on course.

At the same time, he is facing pressure to find funds to ease the rising cost of living and to pay for defence spending. But Labour’s 2024 election manifesto promised not to increase income tax, VAT or National Insurance rates.

Raising capital gains taxes or extending the mansion tax had been floated as possible choices, but government sources have since ruled them out.

UK banks have seen profits increase in recent years because they have been able to charge people more in interest when they borrow money.

There is also a broad view among bank executives that the chancellor is getting ready to increase taxes on banks in this week’s Budget.

£1bn to £2bn a year for the Treasury.

A higher tax would first cut the profits banks can pay out to shareholders.

Some of those shareholders will be wealthy investors. Banks have warned that extra taxes could put off investment in the UK, which could in turn reduce jobs.

Ordinary savers could also be affected indirectly if their pension investments include bank shares.

Banks could also shift some of the tax cost onto customers by offering lower savings rates or higher borrowing costs, according to research.

Former prime minister Gordon Brown has urged Healey to raise the tax on electronic gaming machines — including those in betting shops and adult gaming centres that can pay out £500 per game — because of the social damage caused by problem gambling.

£275m and £460m

- depending on how gamblers responded.

People who use gambling machines could also end up bearing the tax through worse odds on games, although anti-gambling groups say this could help discourage more people from using them.

Research from the SMF found that gambling machines are increasingly concentrated on some of the UK’s most deprived high streets, and that one in four people who play casino games on these machines gamble at risky or harmful levels.

It has also argued that betting shop closures could reduce the money bookmakers contribute to horse racing, potentially putting jobs in that sector at risk too.

Reports say the Chancellor is preparing to announce that major online marketplaces such as Amazon, Ebay and Temu will be made responsible for collecting tax owed by retailers selling on their platforms.

The Treasury estimates it is losing about £12bn a year.

Tax specialists say part of the issue — though not the whole £12bn VAT gap — is that some online sellers do not follow VAT rules, either by failing to charge VAT when they should or by not passing on VAT collected from customers to the government.

Enforcement is difficult because some firms using platforms like Amazon to sell goods are based overseas and falsely claim to be UK-based businesses.

Others shut down and reopen under different company names to avoid their tax bills.

Reports suggest that making the big online marketplaces responsible for collecting the tax, rather than the individual retailers, would crack down on this kind of tax evasion and could bring in about £1bn in extra VAT a year.

£700m

Some sellers could react by increasing prices or leaving the platform, which could affect some shoppers.

But it would also create a more level playing field for online sellers, making sure businesses that charge VAT are not illegally undercut by those that break the rules and do not.

Taken together, the three tax measures above would raise only about £3.5bn a year at most.

That would be modest compared with the sums the Chancellor may need to restore his headroom and fund any new spending.

Prime Minister Andy Burnham said in the summer that he wanted a “fair and lasting” cut to the UK’s welfare bill, while the government is under pressure from opposition parties to find savings from working-age benefits.

Conservatives say they could save £36bn a year by limiting access to welfare payments.

Reform says it would save £50bn a year in this way, although independent analysts say there are doubts about how realistic such large savings would be.

Working health and sickness benefits have risen sharply since the Covid pandemic, and the Office for Budget Responsibility projects the total cost will rise from £68bn this year to £81bn in 2031.

Keir Starmer and Rachel Reeves tried to cut spending on these benefits, external by £5bn a year by 2030, but were forced to back down after a revolt by backbench Labour MPs.

Independent welfare experts and economists say savings from the working-age welfare budget are possible, but would probably require upfront spending to help people into work, which could wipe out any short-term savings for the Treasury.

Cuts to health and disability welfare would reduce the incomes of people who currently receive those payments, external and/or those who would otherwise receive them in future — and campaigners warn that people could be pushed into poverty.

However, if more welfare claimants were also helped into work, their overall incomes could be maintained or even increase.