211. How Should Reeves Fill The £30bn Hole?

0:11Hello and welcome to The Rest is Money with me Robert Perston and me Steph McGovern and we have a guest with us today from the Resolution Foundation, which is, of course, a think tank which looks at, I guess, living standards for people. That's their particular focus. A very, you know, well respected think tank, which is, of course, was run by Torsten Bell for a number of years before he became a Labour MP. We've been talking about him recently and what influence he might be having on the Treasury. But today we've got Ruth Curtis, who's taken over from Torsten. She was previously Director of Fiscal Policy at the Treasury.

0:53She's someone who knows what the Treasury will be thinking when it comes to deciding on this budget. She was there for over 15 years, now at the Resolution Foundation. And very interesting, Robert, for us to talk to, isn't she, from lots of perspectives? Yeah, so we've got the budget coming up in a couple of months time. The Resolution Foundation, as you say, particularly focused on how to help poorer people, they have recently come up with a set of proposals that they are effectively recommending to the Chancellor for raising a significant sum of money. Now, in our last episode, I talked about how the baseline, the working assumption at the Treasury is that they're going to have to raise at least£30 billion because the Office of Budget Responsibility says that productivity is growing slower than it thought, which means the economy is growing slower, which means that there'll be fewer tax revenues.

1:44It's got to pay more interest to government than it thought it was going to have to pay. It hasn't got those welfare savings that it was counting on. So it's got to raise at least£30 billion in taxes. And the thing about Ruth Curtis is she could help us understand how the Chancellor may well raise that£30 billion. So here is our conversation with Ruth Curtis. Ruth, it's great to see you. So we've got this£30 billion hole that the Chancellor needs to fill. It's pretty clear we're not going to see significant spending cuts. So if it's all going to be tax, what are your recommendations to her? How do you think she should go about it?

2:29So as you say, it looks like she's facing this very big hole and that she's going to have to use tax to fill it. That's not easy. She raised£40 billion of tax last year. So to have to come back this year is certainly not straightforward. But the good news is there's no shortage of flaws in the tax system to address. So we do think there are ways that she can look to improve the tax system and raise money at the same time. So our proposals fall basically under three buckets. The first is trying to equalise the treatment of different types of businesses in a way that we think would be pro-growth.

3:03and we also have some suggestions around taxing harms particularly introducing a sugar tax and changing motor taxation but ultimately if the hole is that big we think she will have to raise more taxes from personal taxes and we think the right way to do that is to protect workers pay packets she can do that by increasing income tax while reducing employee national insurance at the same time. So just to understand that, you're suggesting, aren't you, that you cut national insurance by two pence and add that to income tax. So explain the working of that in terms of it not hitting workers, because to me, that hits workers.

3:46So at the moment, if you're an employee, you pay a basic rate, let's say you're a basic rate taxpayer, you pay 20 % on your income tax, of income tax and you pay 8 % in employee national insurance. What that means is 28p in every pound above a certain level is going to the tax man. Now, what we're saying is we should change the balance of that so that you would pay 22p in income tax and 6p in national insurance. But the money you're taking home is the same. You're still paying 28p in every pound. The reason that's worth doing is because for everyone else with other forms of income, like landlords and pensioners, they only pay that 20%.

4:26So we would be asking them to pay a bit more. And employees would still be paying more tax than other sources of income. As you can see, that 28 is still higher than the 22. But it brings them closer together. It means that this disincentive to employment in the tax system, this extra punishment for employment is reduced. But it does increase taxes for the self-employed who are workers are they not so i agree we talk about um protecting employees or workers pay packets so people who have an employer who get a pay packet are protected you're absolutely right that we would be asking the self-employed to pay two percent more and lots of self-employed people work very hard so i think that's a really important point the thing about self-employed is they have done quite well through recent budgets so um this would mean their tax rate was 28%.

5:18That would still be the lowest in decades apart from the last few years because they had some rate cuts a few years ago. Can I just ask in terms of the distributional impact, given that there is a ceiling on the NI, the upper earnings limit on NI, is this a progressive change does this ultimately take more from those on higher incomes um so we apply two percent to everyone two two percent of a higher income is more so it absolutely is progressive in that sense at the moment additional and higher rate taxpayers pay two percent ni so that would go to zero and the income tax rates for additional and higher rate would also go up by two percent oh sorry so this is not so this is not this is not this this is the two percent that doesn't have a ceiling on it that you're talking about it's not just two percent off the ni rate because not all because as i understand it not all ni does uh apply to all income so ni rates at the moment are eight percent and then two percent when you hit a certain threshold we'd be taking that two percent back to zero where it used to be can i just ask as well just on the landlord's point because landlords are kind of often in these tax situations painted as these greedy people who are earning loads of money and being a landlord is a job as well you know I have been a landlord it was the most stressful job I've ever had renting out my house and I had no choice over renting it out because I couldn't get a job where the house was so I moved to London for work rented out the house was a landlord not a you know I didn't class myself as an evil one making i'd certainly didn't make much money for this so you know they're often landlords are painted as these evil people when they're working quite hard too quite a lot of them yeah absolutely and we're not saying landlords are bad people who should be punished we're just saying that we think it's reasonable for landlords and tenants to pay roughly the same amount of tax so we're just saying that reducing the gap between what you pay as a worker and what you pay as a landlord, it would be fair, we think, for those rates to be the same.

7:32But Ruth, are you saying that retired older people are bad people because they're now going to have to pay more tax? No, again, we're absolutely not saying that. But we have seen pensioners enjoy growth in living standards over the last two decades of about 21%. We know that they benefit from things like the triple lock policy, which means that the basic state pension will go up by over£500 pounds next year so in really tough economic circumstances pensioners have done relatively well compared to working age people and so asking them to pay two percent more income tax a tax which as you say robert is is progressive which would therefore you know um only higher income pensioners we think is a reasonable thing to do and when you think about the triple lock together with our tax proposals.

8:22That means even if you did our tax proposals, when you add in the triple lock, only pensioners earning with an income of over£40 ,000 would be net paying worse off. So in terms of what this could raise in income, what have you worked out and how? So we think this would raise about£6 billion. So by putting up one rate but cutting another, because more people pay income tax than pay national insurance. You can still raise quite significant sums of money. But we're still quite a long way from the 30 billion. And so I want to talk to you about some of your other proposals. Now, I am somebody who not everybody does believe in taxing bads, as it were, things that are bad for us.

9:02But I broadly do take the view the tax system should be deployed to discourage certain kinds of behaviour. But not everybody is in favour of a sugar tax. And in particular, as you know, the politics around this are tricky. Lots of MPs on the left and on the right hate sugar taxes because they say broadly, you are making it more expensive for particularly people on low incomes to buy things they like. So talk us through why that is not in some senses regressive, your sugar tax proposal. Yeah. And look, we thought very hard about coming out in favour of a sugar tax because right now food inflation is a really big problem for low income families.

9:49Food inflation running at about 5 % is extremely difficult after the cost of living crisis that we have lived through. But we do have another crisis in the country, which is a sort of health emergency, a health service that is struggling to cope with that. And so I think when you put those things together, we looked back at the National Food Strategy that was done independently in 2021, and they proposed this salt and sugar tax. And actually, when you look at the experience of things like the soft drinks levy, what we've seen is both money raised for public services, but also quite strong reformulation of products that has improved the health of products being offered.

10:37So a 46 % average reduction in sugar in soft drinks is what the government's own evaluation found. so we're really conscious of the impact on food prices that would on its own be regressive and that is why the sugar tax from us is not a proposal to fill the hole we think it would raise about three and a half billion that is the same as the cost of removing the two child limits and we think those things should be done together to avoid the the regressive nature of a sugar tax but still get the health benefits you mentioned there about the impact that the tax had on on sugary drinks and you're right that was brought in in 2018 at the time it was predicted to bring in to raise 1.9 billion over three years if you look at the you know six or seven years it's been in it's actually only raised 1.5 billion because as you pointed out the the reformulation of products meant that the sugar in drinks was reduced now just two points on that then one is what if everything gets reformulated and doesn't raise that 3.5 billion great from a public health perspective but secondly that reformulation of sugary drinks has got everyone drinking sweetness and we don't necessarily know that they're good for our health either do we so you know is there a danger here it might not make raise as much money as you think and have the impact on public health that we want it to clearly um to take your first point there is clearly a trade-off with any of these kind of taxing harms about you're trying to both raise money and achieve behavioural change.

12:09And actually, you might overachieve on behavioural change and underachieve on tax or the other way around. But if we did overachieve on health and underachieve on tax, that would still be good for pressures on the health service. So I think we would still get some of that back. And look, our three and a half billion is a best guess at where we think the balance of those things might play out and there's definitely uncertainty around it. I am not an expert on sugar versus sweeteners. That's why we went back to the National Food Strategy which had people much more expert in food than me. But just the salt element has quite incredible kind of, they think, benefits for health, adding, you know, maybe a couple of months to life expectancy on average in the UK which just seems really worth having to me.

12:54As you said in your intro, was that you had proposals that would help stimulate growth. Putting taxes up, in my experience, never actually stimulates growth. So what are you talking about here? Yeah, and look, we should be really clear because, you know, I'm not in favour of higher taxes because I like taxes. We start from the same place you did, Robert, that it looks like the government has a hole and in the end, getting the public finances fixed. is necessary for growth as well as for other things. For a think tank that is focused on living standards, we haven't come out and said we think business should bear the burden of the tax rises here because we do think given what was done in the last budget and given the tricky economic outlook, that would not be the right way to go.

13:43But there are some businesses who are undertaxed and some changes that we think could improve growth more than just putting other taxes up right so to give you a concrete example um currently the vat threshold in the uk the threshold at which you have to register as a business and to charge and pay vat is 90 000 pounds that's double the oecd average and we see really concrete effects on the size and shape of businesses with businesses kind of bunching at turnovers just under 90 000 pounds now that is basically a disincentive for those businesses to grow and we see that really clearly in the data so we would lower that threshold that does raise money but it would remove this disincentive for businesses to grow in the UK so we think it could in the end have growth benefits.

14:32Yeah we have looked at this on this on the podcast and you're absolutely right as a matter of logic any kind of disincentive on businesses to get bigger is obviously a very bad idea and as you say there is all this evidence that there are a lot of businesses that either don't grow and to avoid hitting that threshold or engage in black economy tactics and, you know, essentially lie about what they're earning in order to stay below the threshold. Obviously, none of that's a good thing. I guess the counter argument I would put to you is that actually managing VAT is a bit of a chore and there's a cost around it.

15:15The reason people don't want to go through the threshold is they hate all the admin around VAT. It's partly that there's a competitive thing. They don't want to charge their customers. They think they'll get less business if they put their prices up by 20%. But it's also they just hate the chore. Are you confident it would be pro-growth? Well, I don't think it's good that the kind of admin of having to do VAT might be stopping businesses that could seriously grow in size. We know that it causes problems in competition between businesses. You know, hairdressers can structure themselves in different ways.

15:54And that means you get this unfair competition that might make it really difficult for people to tip over the threshold. So it would certainly not be welcomed by those businesses that would suddenly have to do that admin. But in the end for the economy, it is not about supporting specific businesses. It's about having a dynamic and vibrant competitive environment. I think this would support that. The other thing that you highlight about small businesses in particular is the unpaid tax. And again, we spoke to Dan Needle from Tax Policy about this, about the fact that the majority of tax that's unpaid is small businesses not paying the right corporation tax.

16:40It's something like a third. They say a third of corporation tax owed by small businesses is not being paid. You're suggesting that's one of the ways which we can get more money in. How? How do we solve that, do you think? Yeah, no, look, that's a fair question. And we said at our event yesterday of all of our lists, this one's a bit of a cop out, right? If only we could get those businesses who currently don't pay tax to the tax that's due to pay it then then would be better off and that's true and it's pretty normal in any budget package for a chancellor to have some anti-avoidance measures this looks like the most likely candidate for us for this budget so when we think about robert's 30 billion pound whole um will you know we should assume that the chancellor will find some of that from anti-avoidance but um you know it's much easier for me to say that i've I've been on the other side in the treasury and it doesn't mean it's easy to do.

17:35Ruth, there are more tax ideas to get through, but let's have a quick break. This episode is brought to you by Wealthify. If you've ever thought I should really do more with my savings, you're not alone. Most of us are busy juggling work and family life, so investing can feel complicated. Thankfully, Wealthify makes it simple. You put your money in, their experts take care of the rest. No picking your own stocks, no jargon, just a managed investment plan you can keep track of 24-7. Open a Stocks and Shares ISA, Personal Pension, or a Junior ISA for the kids, and with over 100 ,000 customers and the backing of Aviva, you know your money's in experienced hands.

18:18Plus, when you deposit or transfer to a Wealthify Stocks and Shares ISA, you could earn between£50 and£1 ,000 cash back. Please note that minimum investments apply and cashback varies by the total amount of your deposit or transfer. So for investing, savings and pensions, the smart money's with Wealthify. Open your account today at wealthify.com. Wealthify is authorised and regulated by the Financial Conduct Authority. Offer registration closes on the 2nd of March, 2026. T's and C's apply. With investing, your capital is at risk. Now I've got some big questions to ask you, but just run us quickly through how your numbers add up to 30 billion.

19:00What are just the other bits we haven't talked about so far? Yeah, so it is a long list, I'm afraid, but some other big ones are extending the personal tax freeze on income tax for two years. That raises about... And just to be clear, you don't think that's a cheat because, you know, there are lots of people, that is a way of putting people's taxes up. This is a government that said it wasn't going to put income tax, but that is an increase in income tax for very large numbers of people. Yeah. And just to add to that, the IFS have worked out that if you keep the threshold frozen, that will bring in 4.5 more people into higher tax brackets by 2028.

19:43So those people, those 4.5 million people will be getting a tax increase. Yeah. And it is an increase in income tax and it's not an increase in the income tax rate, which our other proposal does involve. So look, we have tried to think about what are the right things to do in this really tricky economic situation where we've got sticky inflation, but low growth, and we need to raise lots of money. If you like, that's hard enough. When you add the manifesto on top and those commitments, it's clearly even harder. But I think the useful thing for a think tank like us to do is to think what might be politically achievable, but also in line with the right thing to do in this really difficult economic situation.

20:27So extending the personal tax freeze does mean people paying higher income tax. It raises about seven and a half billion. The reason we think that might be reasonable is because actually middle, median owners in the UK still pay lower tax rates than they have in the past overall, even though the overall tax take which we hear so much is at a historic high. So that's why we've come to the view that with a big hole that... Just so that listeners can understand, when you talk about taxpayers in the middle paying less tax than perhaps they have in the past, tell us about the kind of incomes you're talking about and how far back you're going when making that assessment.

21:13So when you go back, for example, to just pre-financial crisis, the rates on a median earner, which is about£30 ,000, will still by the end of this forecast be just lower than they were pre-financial crisis. Not at all dramatically lower, but I think when we hear so many headlines about historically high tax rates, it is sometimes underappreciated that those are also coming from different places than they were in the past. And so it doesn't mean that this median owner is necessarily paying much higher tax than they were in the past. So tell us about the other things. So so far, we've had the cut in national insurance added to income tax, the threshold freeze, the getting small businesses to pay what they are, sugar, salt tax.

21:59What else is in there? The two other big areas, one is on how we tax cars. Actually, when you think about that 30 billion hole, it probably assumes that fuel duty will go up by something like 6p this April because we had this temporary cut in fuel duty that's never been unwound. and it's assumed that fuel duty will keep rising. So we have some suggestions that actually cost money, but cost less money than what governments have done in the past, which is simply to continue to freeze that fuel duty. And we also think the government needs to think really seriously about the taxation of cars in general as we move from petrol cars to electric vehicles.

22:42So we have some suggestions there. Yeah, could you just tell us what is your suggestion on, on because this has been a problem that's been causing tremendous anxiety in the treasury for some time what is your proposal uh for how you properly tax electric vehicles given that they're not paying petrol duty um so we would reform vehicle excise duty for all new vehicles in a way that would um make it a function of um both distance driven each year and the weight of the car and we think that you know essentially what we have to get to is a tax on congestion which is an externality that is otherwise untaxed and we'll have too many cars on the road.

23:22So there is a kind of issue that needs addressed. If we also adjust it by weight, that's a better reflection of some of the net zero aims and the carbon that each car is using. We're talking there taxing, older, noisier, air-polluting cars. And that therefore means you're going to hit people who have got those older cars, which is often lower income people who can't afford to buy an electric car or buy the latest version of a car, which would be more carbon efficient or whatever else. And so isn't there a danger there that you're going to hit the lowest earners? So a couple of things. Our suggestion is that you do this now, but you do it for new vehicles, partly to deal with some of those issues, Steph.

24:11And that is one reason why actually this is an area where the government needs to kind of grasp the nettle before it's a really, really urgent problem because then you can do it for new vehicles and you can ease it in. The other thing is our suggestion to do it by weight we think is progressive. So we see lots more of these heavier cars. They tend to be much more expensive and so that does mean hitting those cars that tend to be bought by higher income families more. And can I just ask on the mileage bit of it, would you expect people to self-report or are you expecting somehow the government to have access to your odometer?

24:50Because of course, most modern cars are part of the internet of things, as it were. So in theory, the government could monitor how much we're driving each year. What's your view on that are you trusting people to tell the truth about their mileage or do you think the government should basically spy on us as we drive so i think um the technology is clearly there that um uh for us to have a reasonable way of checking how much people have driven each year i don't think that that would require the government to have access to everyone's gps right it just requires uh an annual or a random check on your mileage which just in the age of current technology doesn't doesn't feel impossible to us so you'd self-report but there'd be checks to check that every so often to sell you could do it that way or it could be part of your you know your your mot that you um get your mileage verified i can see um lots of ways to do it that don't involve the government um tracking every every mile you drive live if you like which is um i'm not sure something any of us want so just the final kind of big area we we haven't talked about i guess is capital gains tax and obviously there's been a lot of talk about um wealth taxes which might be a notable absence um in our list of of suggestions in that we don't suggest a net wealth tax we don't think um uh quite apart from the economic arguments that the government is any positioned to introduce a net wealth tax this autumn uh that would raise money in any kind of short period of time.

26:25We don't have a record in the country of everyone's wealth. Just to be clear, that's not an issue of principle for you. It is just that it would be technically very hard to do and they need the money now. Yeah, I think for me that trumps it right now. And also we do tax the gains from wealth in different ways and we do have imperfect ways of doing that. So it seems much more pragmatic to focus on making those better. At the moment, if you leave the country, for example, then you don't pay capital gains tax on gains you made while you were here. We think that's a really big loophole in the system that they could raise quite a lot of money from closing.

27:09And you're not worried that that would change behaviour in terms of what people do with their assets, their investments, where they're domiciled and everything else? Well, at the moment, in some ways, it's surprising I think that more people don't make sure that they realise their gains after they've left the country. So at the moment, it's this huge loophole that is driving an unknown amount of behaviour. But the more that we want to tax wealth and tax it properly, the more we need to close these loopholes. And just explain how the loophole works again. Say you invest in a business or you set up a business and you make a big gain.

27:45if you leave the country before you realise that gain then you never pay tax. That's quite unusual. Most other countries have a mechanism for ensuring that you settle up your gains before you emigre. And how much do you think that would raise? We think that would raise about£2 billion. We would also suggest this is a bit grimmer I'm afraid but that those gains aren't forgiven when you die and that raises another£2 billion. So all in all, we think from closing some of these loopholes in capital gains tax, you could raise quite a chunky£4 billion. I mean, that's per annum, is it? I'm surprised it's as much as that, but the evidence shows it's as much as that every year.

28:30Absolutely, because at the moment, if you hold on to an asset until you either leave the country or you die, then you're never paying tax on the gains from that asset. And I don't know how surprising it is when you think about how much wealth has grown in the country over the last 40 years. You know, it used to be about three times GDP and it's now six or seven times GDP. But the tax we get from wealth has not gone up at all. So it should be an area where we should expect to be able to raise money, but we should do it by making our current taxes work well rather than a new net wealth tax. And so that is the package then that gets us to 30 billion.

29:10Yeah, I think we talked about almost all of it. Yeah, well, although to be clear, you have to knock off three and a half billion because you're giving it back in terms of ending the two child. But look, I want to ask you about some big issues of principle here. So I suppose the first, I would take the view that given that they've got to raise a lot of money, the simplest, least growth destructive thing for them to do would be to look at probably not the corporation tax rate, but actually just look at how much tax all of us pay through these very big taxes. do you think they have harmed themselves economically by ruling out any ability to adjust those rates i think if you thought about what's right for the economy right now accepting that we need to raise um such large amounts of tax i think you must be right robert that um that if those promises are interpreted very literally then then they have economically damaged um and And I wonder whether, you know, if it's another 30 billion this autumn, I think if during the election period it had been as specific as you'll need to raise 70 billion pounds in tax.

30:25And how could you do it without breaching those promises? I think we'd have all said that looks very, very hard to do without some economic damage. And so it would be better not to have made those promises. Yeah. And I think what one of the things we talked about in the last episode on this, Ruth, is, but the problem is by then coming back and asking for more, you are letting down people and we are seeing the impact of the changes to the business taxation really hitting businesses and employers, you know, indirectly through them letting people go or even putting up prices and things like that.

31:02So it's hard for people to stomach. Do you think what you've suggested would make people feel better? Because that's what I feel like the economy desperately needs is that sense of life's going to get better. Well, I think what's important when we let's imagine we didn't have the manifesto and we were thinking about what's the right thing to do. And quite, quite often with a fiscal hole, economists would say VAT is the good tax, let's put VAT up. That looks to us like the wrong thing to do right now when inflation is still struggling to come back down to target. normally we would say don't worry too much about that the bank of england can look through a kind of tax change but just right now with the uk um this particularly sticky inflation compared to internationally that doesn't look like the right way to go okay just ask you on that obviously tax experts economists have been looking at this idea of reducing the headline rate but then broadening the scope.

32:01So you could raise quite a lot of money by cutting the overall rate to 17.5%, which might well be consistent with their manifesto commitments, but then extending it to food. Are you saying that because of the inflationary impact of putting VAT on food, and indeed, this would be particularly difficult for those on low incomes, it would absolutely squeeze the living standards of those or no incomes that you that's why you haven't gone down that route yeah look i think there are some ideas for tax reform that are that that stay in the good ideas bucket but don't look like easy ways to rage raise large sums of money you know i worked in in george osborne's office in 2012 when he tried the the pasty tax that base broadening is extremely difficult to do and so whether um you know as as great as it sounds to um put vat on on kids clothing and food and cut the overall rate i just don't see that being plausible for this autumn myself you were burned by the omni shambles a little bit a little bit ruth is at this point you're glad you get to suggest the things but not have to actually make the decisions and not be the one who delivers it all.

33:15Well, look, I'm certainly really enjoying being outside the day-to-day back and forth of the Treasury and having the chance to sit back and think about what some new ideas might be. And Ruth, it's been brilliant to chat to you. Thank you. Yeah, thanks very much and come back soon. And that's it from The Rest is Money. Goodbye from me. And me. Bye-bye.