Andy Burnham pledges ‘cost £63bn’ – and tax ideas could backfire
A series of tax cuts and spending pledges proposed by Andy Burnham and John Healey could cost the government up to £63bn by 2030, new analysis has shown.
Promises on defence, social care and council housebuilding could leave the Chancellor facing a bill of between £46bn and £63bn by the end of the decade, which equates to between 1.5 per cent and two per cent of GDP, according to a report from Capital Economics.
The cost load weighing on Healey could put him in a difficult position and bond traders are near the limit of what they can “tolerate” in extra borrowing, Ruth Gregory, chief UK economist at Capital Economics said.
The former Chancellor, Rachel Reeves, came under fire as her two budgets cumulatively raised about £65bn in extra taxes, hitting the jobs market and leading to complaints from lobby groups ranging from farmers to pub landlords.
The size of the fiscal headroom – the buffer the government has before it breaks its own fiscal rules – has also likely deteriorated since March, the research group said.
Burnham’s costly pledges
Gregory estimated that the largest costs could come in the form of making social care free at the point of use, which could add to £18bn in annual expenditure, while boosting council housebuilding to pre-war levels would require between £12bn and £23bn in extra spending.
Healey, who resigned as defence secretary after Sir Keir Starmer refused to lift spending on the military to three per cent by 2030, could also be required to find an extra £11bn each year to meet his ambitions. On Wednesday, Burnham refused to commit to lifting defence spending to Healey’s demand.
Another £9bn in costs could come in the form of unfreezing the £12,571 personal allowance threshold, which Burnham appeared to hint at before later turning back on his comments.
And a collection of small pledges on business rates cuts, stripping VAT from energy bills and ending rough sleeping could rack up billions of pounds more in costs and add to fiscal pressures facing the government.
Capital gains tax plan could cost another £7bn
The report by Capital Economics also cast doubt on revenue-raising measures floated by Burnham and other senior Labour figures.
The leading economist warned that aligning capital gains taxes with income tax rates could lead to a fall in receipts to the tune of £7bn as investors either delay selling assets or pull cash out of the UK. A proposal to align wealth taxes with income tax rates has been endorsed by Wes Streeting and a host of other Labour MPs.
In an interview with City PM, former Bank of England deputy governor Andy Haldane, who has advised Burnham on economic policy, urged the government to avoid using capital gains tax hikes as a “cash cow” for more spending.
Burnham has claimed there was “flexibility” in the fiscal rules that could allow him to use further cash for investment. While Gregory suggested that there was “some scope” for borrowing, she warned the bond market is “already close to the limits of how much extra borrowing it will tolerate”.
There is likely a ceiling of £15bn extra borrowing for investment, she said.
Before the Iran war, the Office for Budget Responsibility said the size of the fiscal headroom was £22.7bn, though most economists agree that the energy price shock hitting markets since March has squeezed the buffer.
Long-term gilt yields, which translate into UK government borrowing costs, briefly hit a century-high and have remained elevated over the last four months. It means the fiscal headroom is likely to be closer to £10bn, according to analysis by Capital Economics and other organisations such as the Resolution Foundation, a left-leaning think tank.
Gregory said she doubted commitments would be “realised in full”, particularly as Burnham again emphasised Labour’s commitment to not raise income tax, national insurance or VAT.