Keir Starmer warns autumn budget will be ‘painful’ and so what taxes might be raised?

| Marc da Silva
Sir Kier Starmer

Taxes are likely to increase in the Labour government’s first budget, the chancellor Rachel Reeves, had already told the press last month, and now the prime minister, Sir Kier Starmer, has also hinted at tax hikes, after yesterday warning that the upcoming October budget would be ‘painful’.

The chancellor has ruled out raising national insurance, VAT or income tax but says there are ‘difficult decisions to come’ amid a £22bn public finance shortfall, with changes in inheritance tax, capital gains tax and pensions all very possible when the budget is revealed on 30 October.

In his first major speech from Number 10 since becoming prime minister, Starmer blamed the Conservatives’ legacy for what he called an economic and societal ‘black hole’, and warned the public to expect more unpopular decisions in the near future.

The prime minister said: “I will be honest with you, there is a budget coming in October and it’s going to be painful.”

He added: “Just as when I responded to the riots, I’ll have to turn to the country and make big asks of you to accept short-term pain for long-term good. The difficult trade-off for the genuine solution.”

Sir Keir said “those with the broadest shoulders should bear the heavier burden”.

It is not yet clear what tax changes will be announced on 30 October, but the government has, as stated in its public spending audit 2024-25’, published on 29 July, already committed to tackling tax non-compliance, including from fraud and tax avoidance, “to ensure everyone pays their fair share”.

“The government will increase HMRC’s compliance staff, invest in HMRC’s resources and technology infrastructure, and make legislative changes to tackle tax non-compliance and raise revenue,” it added.

So far, Rachel Reeves has remained committed to tax changes as set out in the Labour Party Manifesto (non-doms, VAT on school fees and more tax on carried interest).

On 29 July, she also confirmed the abolition of the Furnished Holiday Let rules and the withdrawal of charitable rates relief for private schools. There was also confirmation that the restriction of the winter fuel payments will be aimed at a much narrower group.

Looking ahead, fuel duty is likely to go up, while increasing the main capital gains tax is widely expected by many economists. Inheritance tax is another levy that the government will look at.

As far as other changes are concerned, plenty of possibilities have been raised, including business property relief (BPR) on AIM shares and agricultural property relief (APR) on let farmland.

Another option is simply a so-called stealth tax – a means of raising revenue which is not explicitly labelled or intended as a tax, such as reviewing the the amount of money you can earn before any tax starts to be paid.

Tom Clougherty, executive director at the free market think tank the Institute of Economic Affairs, commented: “The government is softening voters up for a tax-raising budget in October.

“There is obviously a tension between raising revenue and prioritising wealth creation, and that will be especially pronounced when increases to the main, broad-based taxes – income tax, national insurance, and VAT – have been ruled out.

“The remaining possibilities – higher taxes on business, on savings, and on investment – are likely to have an outsized impact on growth, and as a consequence may not generate as much revenue as the government expects.

“It is also important to remember that the incidence of a tax doesn’t always fall on the person who pays it. Workers usually lose out when corporation tax is increased, for example. Significant tax increases that don’t affect ‘working people’ are a fantasy.”

 

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