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Rachel Reeves now has the perfect excuse to raise taxes in the October Budget after huge public sector pay rises fuelled a £3bn increase in government borrowing last month.
Not that the chancellor needed an excuse. She has been sounding the alarm bells since the election with her desperate warnings about a £22bn black hole in the public finances and the fact that the last government left Labour with the worst economic legacy since the Second World War.
But now he has a more legitimate claim, or so he will say.
What’s next? Rachel Reeves now has the perfect excuse to raise taxes in the October budget
July figures from the Office for National Statistics (ONS) show the Treasury has borrowed £51.4bn this year, £4.7bn more than the Office for Budget Responsibility (OBR) had predicted.
Borrowing last month was higher mainly because of recent generous public sector pay deals which the OBR says may have cost around £5.8bn more than planned.
And there is more to come on that side of the equation, as the spending figures do not include recent generous pay deals for junior doctors or train drivers.
A stronger economy over the past six months boosted revenues to £91 billion in July.
This figure was slightly lower than expected but still some £1.7bn higher than the same month last year due to higher income tax thresholds, higher corporation tax rates and VAT.
Now it looks like Reeves will be planning a multi-billion pound tax raid in his first budget on October 30, which is already being dubbed the Halloween raid.
Pay rises: The spending figures do not include recent generous pay deals for junior doctors or train drivers.
You can see why.
Economists estimate that the Chancellor of the Exchequer will want to raise at least £10bn a year through higher taxes and increase borrowing by around £7bn.
Reeves repeatedly promised during the election campaign that the main rates of income tax, national insurance and VAT would not be increased.
That leaves only Labour’s favourite honeypot to plunder: raising inheritance and capital gains taxes.
It would be a profoundly foolish decision if Reeves were to tighten the noose on these wealth taxes, specifically if he were to eliminate or interfere with corporate ownership relief, which allows family businesses to pass on their companies without huge tax liabilities.
The tax increase could even cost the Treasury dearly. Some accountants estimate that up to £2bn could be lost if it does so, as those with money to spare are now looking for ways to protect their wealth.
And that’s not just scaremongering. From what I hear, estate planners are being called back from the beach to advise their clients on setting up trusts and other legal loopholes ahead of the Budget.
There are nine weeks left to prepare for Halloween. Thousands of millionaires have already left the country in anticipation of the Labour Party’s election victory.
Many more are planning to do so. What would be absurd is if higher taxes also scared away high-net-worth individuals, who are often the most prolific wealth creators.
Instead of taxing them more, Reeves should look for incentives for them to reinvest their wealth, since they are the ones risking their capital by investing it in the next generation of companies. If in doubt, Reeves should look back to the 1970s.
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