If there is one number the government wants the public to recognise at the moment, it is £22bn. That is the supposed size of the black hole in this year’s public finances. Rachel Reeves announced the number just before the summer recess, clearly with the purpose of preparing the country for tough measures – including tax rises – to be announced in the Budget on 30 October.
There is some question as to how robust this number really might be. Treasury officials were unable to provide details when asked last week and at least some of that number can be explained by policy decisions taken by the government, such as settling disputes with train drivers and junior doctors.
It is perhaps surprising that the government has focused so heavily on 2024/25 in that the real issue is what will happen in subsequent years for which Jeremy Hunt pencilled in implausibly tight spending figures. But we have long known that this was the case, even when Labour denied it during the election campaign.
If there was any doubt about our fiscal predicament, this should have been dispelled by the Fiscal Risks and Sustainability Report published by the Office for Budget Responsibility last week. This shows that on current trajectories our debt-to-GDP ratio is set to increase to 274 per cent in fifty years.
All of this suggests that taxes will be increased and some areas of spending will be cut. This is an uncomfortable position for a government. The public might well be persuaded of the case for tax rises and spending cuts but they are less likely to be persuaded of tax rises and spending cuts that have an impact on them. The bill, many will be inclined to believe, should be paid but by someone else.
It is in this context that calls for a wealth tax are growing. The Greens favour it and say they can raise £15bn a year. Sharon Graham, the general secretary of Unite, is campaigning for a wealth tax on the 50 richest families in the country that will raise £25bn as a one-off tax.
We already have various taxes on wealth. It would be no great surprise if the Budget contained measures to raise more revenue from capital gains tax, inheritance tax and even council tax for more expensive properties. But a wealth tax, as commonly understood, would go further by assessing the total wealth of an individual and then levy a percentage charge on all of it above a threshold.
This is not a new idea. The Labour government in the 1970s considered it and in spring 2020 – in the context of the Covid pandemic, when government debt was increasing rapidly and wealth inequality was under scrutiny – an independent commission considered the policy.
The commission was led by two economists – Arun Advani and Andy Summers – who have focused on the taxation of the wealthy. It would be fair to say that they both favour a greater tax contribution from the wealthy and in some of their work – such as the taxation of non-doms – they have concluded that there is more that can be raised than many other commentators would expect. To put it another way, one might expect them to be enthusiasts for introducing a wealth tax.
It is therefore rather striking that they concluded that an annual wealth tax would not work. The commission argued that it would be administratively expensive, to the extent that it would be unfeasible unless the thresholds were set high, and could also face “considerable behavioural responses”, reducing the tax take. Curiously enough, trying to raise very large sums of money from very few people does tend to do that.
Instead, the commission recommended a one-off wealth tax. This has a benefit in bringing down debt which in turn will have an ongoing positive impact on the government’s debt interest bill. But a one-off tax does not address the long term challenge that we are forecast to spend much more on public services than we collect in annual tax revenue.
Even if we look at a one-off tax, the commission’s calculations suggest that a wealth tax would have to apply much more broadly than the billionaires that some supporters of a wealth tax suggest. To raise enough revenue to reduce the national debt by 10 per cent, for example, the Commission set out by way of illustration a wealth tax that applied to those whose wealth exceeded £500,000. When one takes into account that this wealth would include housing and pension saving, this would be paid by 17 per cent of all adults in the UK. That is not the impression one would have got listening to the Greens or Ms Graham.
The record of wealth taxes elsewhere is unimpressive. As the Labour-supporting tax lawyer Dan Neidle has pointed out, Austria, Denmark, France, Finland, Germany, Luxembourg, the Netherlands, and Sweden have dumped their wealth taxes and Spain raises just EUR632m from theirs. The only place that does raise substantial revenue from a wealth tax is Switzerland which unlike us has no other taxes on wealth. As Neidle puts it, “there’s never been a country with a ‘normal’ tax system that’s had a successful wealth tax. Not one.”
Just as some on the right attempt to avoid the difficult choices we face in delivering sustainable public finances by claiming that all we have to do is eliminate wasteful public spending, there are some on the left who pretend that a wealth tax can solve all our fiscal problems. This too is delusional.
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