Reality Check: who's left to tax?

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0:34Welcome to kite flying season. With two months to go until Andy Burnham and John Healy's first budget, we're beginning to get a sense of what they want it to look like. The headline? Not very much. They want a pretty small non-event. The fiscal rules will be met, some relatively minor cost of living interventions will be funded, and there'll be a great deal of talk about fiscal devolution, about moving money and power away from Westminster as part of Burnham's big plans. Healy is also determined to avoid the leaks that plagued Rachel Reeves. The Chancellor has gone really quite far with this. The Treasury has introduced a new high-security computer system that's meant to prevent civil servants from downloading documents, printing them out and sending them out to journalists.

1:25There's really not meant to be any leaks under the system. Now, will any of this stop the leaks? Who knows? In my experience, when leaks do come from the Treasury, they tend to be deliberately put out there by the Chancellor's advisors, or they come from people mouthing off in the pub. And if you are going to leak a document, you don't send it from your civil service email, you take a picture of it. The real way that things come out is because budget measures are discussed with outside stakeholders and interest groups, and they tend to be rather more leaky than those in His Majesty's Treasury.

1:57But more importantly, despite Healy's crackdown, it seems Burnham is still willing and keen to fly the odd kite. We got the first one of those last week on tax during the Prime Minister's visit to Ukraine. Asked by TV journalists whether tax races might be needed, Burnham didn't rule them out. He said he won't be unrealistic and that we're in a challenging position. Cue the usual questions. Is this the government preparing the ground so a tax rise doesn't seem so shocking on the 28th of October? Or are they dangling the idea of taxes with no intention of actually raising them so that we're grateful when it doesn't happen?

2:37Either way, I thought this was a good moment for Reality Check, because there are five facts about the British tax system that are worth keeping in your head over the next two months. Hello and welcome to Reality Check. I'm Michael Simmons, the Spectator's economics editor. Fact number one. Budget speculation really can change how much tax the government collects. Healy's right to worry about this one. Just look at capital gains tax. Before Rachel Reeves' second budget, there was widespread speculation that CGT rates were about to rise. Investors, therefore, had an obvious incentive. Sell their assets to realise the gain now and pay the tax at a lower rate and avoid a potential higher one.

3:21And that is exactly what happened. The effects on the public finances were enormous. If you look at capital gains tax receipts, there's a huge jump towards the end of last year and in the run-up to that second budget. And this is an extraordinary spike in kind of the history of this tax. So that was in some ways good news for the Chancellor. A real windfall. This is a trick that can only play once. There's not going to be a second windfall next year. So budget speculation really can drive taxpayers to change their behaviours, and not always in a way that's positive. That brings us to fact two.

4:01Britain's tax burden is extraordinarily high by British standards. Now, you've heard me bang on about this. You'll have read it in my columns so many times. But it is worth remembering. overall taxes are forecast to make up nearly 39 % of our GDP at the start of the next decade. That's above highs since World War II. So Britain's tax burden is already around its highest level since the late 1940s. And on current forecasts, it's heading comfortably above the post-war records. This episode of Reality Check is sponsored by Artemis Fund Managers. When it comes to investing in financial markets, you've got a choice.

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5:14As with all investments, your capital is at risk. Which brings me on to fact three. This is a pretty recent phenomenon, and we've just lived through two extraordinary tax-raising parliaments. The last Conservative parliament raised taxes largely by inducing fiscal drag, more than any before it. But already this parliament seems to have beaten it, pushing up taxes by nearly£75 billion. But this is where we get to the really weird bit. Fact four. Taxes on the average worker are actually not all that high. Now this fact sounds completely incompatible with everything I've told you so far. But it just is true.

5:58Take income tax and the employee portion of national insurance and it's a smaller proportion of earnings for a single average earner than at any point in almost 50 years. And that tax burden for the average worker is pretty low by international standards too. For a single person earning the average wage the OECD calculates that income tax and employee social security contributions are about 23 % of gross pay, compared with 25 % in the OECD on average. But it's weird because successive governments have announced enormous tax rises. And it of course doesn't mean that the average household hasn't escaped this record birding, whether it's VAT, council tax duties, and the effects on the employment market.

6:49But it tells you something about who we've taxed when it comes to income. And it's something the Tories and Labour both don't want to talk about. They've gone for the rich. The Tories arguably brought about the most progressive tax system in recent years. So Britain can have an enormous tax burden overall without that direct bill falling on the average worker. But it also means we've already taxed the rich. There's no one really left to squeeze. And a final fact, fact five, is that whatever the government might say, another tax rise at the moment isn't actually inevitable. And this is where I think some of the pre-budget coverage gets ahead of itself.

7:35At Rachel Reeves' last official forecast in March, the government had just under£24 billion in headroom against their main fiscal rule. Now since then, things have clearly got worse. The Iran war, higher borrowing costs and new pressures, as well as Andy Burnham's spending announcements, will have eaten into that. But we're not in a situation like Reeves found herself in where it was totally wiped out. Even the most pessimistic estimates only have that headroom falling to about£10 billion. Mild spending restraint could easily top that back up. And if you really wanted to, you could leave it at that thin level.

8:16Now, tax rises might still be necessary in the eyes of the government if the OBR slashes their economic forecasts more than people expect. They'll certainly be necessary if Burnham comes out of nowhere with a massive spending spree. And Healy might decide he wants to rebuild as large a buffer against the fiscal rules as possible. All these possibilities could happen, but don't we need to remember there are choices. Nothing is inevitable. So when the next tax kite appears in the media, whether it's the Treasury is looking at wealth taxes, property taxes, pensions, banks, capital gains again, whatever it might be, just remember those five facts.

9:01Thanks for listening to that episode. Do ping me an email if you think there are any other important tax facts that I've forgotten to mention. If you're watching on YouTube, don't forget to subscribe and tap the bell so you never miss an episode. and for our archive of episodes, go to spectator.com forward slash reality channel.

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