Labour’s October budget, like any government budget, serves several purposes. Yes, they are how the government raises tax money and so the highlights are always about the changes that are aimed at increasing or reducing tax. But there’s more to it.
The real purpose
A more important purpose of Labour’s October budget is that it should facilitate and enable the UK economy to grow. A good budget should be pro-growth and pro-fairness, addressing flaws in the tax system that create barriers and inequities. Here are some examples of where the current system falls short:
- Unfair tax thresholds
Consider a parent earning just under £100k and another parent earning just over £100k. The tax paid by each can be vastly different due to the way the system is structured. Crossing this threshold by even £1 can mean paying several thousand pounds more tax, creating a disincentive to work and earn more. This is an unfairness that Labour’s October budget needs to be addressed.
- The VAT registration threshold
The VAT registration threshold is currently £90k, and this holds back many small businesses
from growing. This means the business owners and their families aren’t doing as well as they could, and could also mean those businesses aren’t employing more workers. Small businesses employ a significant portion of the UK workforce, allowing them to grow would mean more jobs and a stronger economy. There have been numerous academic articles written about this and it is time for this threshold to be reconsidered and lowered.
- Stamp Duty on shares
Stamp duty on shares is one of the factors making the London stock market less competitive to other countries. Labour’s October budget could address this by reducing the tax, which would help boost London’s position as a leading financial hub.
Tax changes don’t happen in a vacuum
It’s easy to focus solely on tax changes, but they don’t happen in a vacuum. Tax increases, for example, often lead to changes in behaviour that can undermine their intended outcomes.
If the top tax rate goes up to 50%, then more people will stop doing overtime, retire early, or find ways to reduce their tax burden. In other words, putting up taxes means the people who are affected will change their behaviour to lessen the impact on themselves and their families. This means less tax is raised despite a tax increase.
Take the proposal to impose VAT on school fees as a case in point. Labour estimates it will raise some £600m in tax – whereas the conservative party estimates that it would actually cost around £150m. The reason? Parents might withdraw their children from private schools, moving them to state-funded schools, shifting the financial burden.
Who is going to be right? Only time will tell!
The wealth flight risk
Labour’s October budget also needs to consider the risk of wealth flight. If wealth creators feel they are paying too much tax, they might choose to leave the UK for countries with more favourable tax regimes. The wealthiest often pay the most tax but also have the greatest flexibility to relocate elsewhere if they feel overburdened. This kind of wealth flight could have serious consequences for the UK economy.
I expect most of the fairness and growth points will be lost in the hype of the tax increases!
Many of the essential fairness and growth issues may be overshadowed by the noise around tax increases. While tax changes make headlines, the broader impact on economic behaviour and the UK’s competitive position is equally crucial.
Wondering how Labour’s October budget might affect your business? Get in touch at [email protected] to stay ahead of the changes and strategise your next move.