Tax Doubts Look Set to Dog Keir Starmer to Election and Beyond

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(Bloomberg) — Keir Starmer's path to power in the U.K. general election appears unassailable with less than three weeks to go, but for the investors, economists and ordinary Britons who will vote for him, the Labor leader has yet to settle a key question: Will his tax and spending plans add up? ?

This week, Labor unveiled a manifesto outlining a dovish position based on economic growth spurred by planning liberalization, energy market reform and well-defined tax rises worth 8.6 billion pounds ($10.9 billion) to help fix Britain's ailing public services.

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Midway through the campaign, launched by Prime Minister Rishi Sunak in a surprise announcement on May 22, voters appear to be buying Labour's offer after 14 years of Conservative governments marked by political and economic turmoil. Starmer emerged from this week's statement launch and questioning by TV journalists unscathed, and Bloomberg polls gave his party a 21.6-point lead over the Conservatives on Friday, virtually unchanged from three weeks ago, enough for a clear majority.

However, some experts responded with skepticism. Paul Johnson of the Institute for Fiscal Studies said Labor was engaging in a “conspiracy of silence” over the economic difficulties facing the next government, while former Labor shadow chancellor Ed Balls said Starmer had put the party on a financial “handcuff” by excluding him. Both austerity and tax increases.

Bloomberg Economics said the statement left questions about government spending “unanswered,” estimating that £20 billion needed to be found to fund protected departments and prevent real spending cuts elsewhere.

What does Bloomberg Economics say…

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“Further tax increases will be needed to keep the fiscal position sustainable and maintain the quality of public services.”

—Dan Hanson, Bloomberg Economics. Click for insight.

The next government's economic legacy – as well as pledges on health, education and defense spending – means that other parts of public spending, such as prisons, the environment and local government, look set to come under pressure in the absence of new sources of cash. Many economists – and voters – believe a Labor administration will need to raise taxes by more than Starmer allows.

It's a topic that contributed to the Conservative Party's last-minute effort to avoid a crushing defeat: Treasurer Laura Trott held a press conference on Friday in which she claimed Labor would raise 18 different taxes. This may be false, but even former Labor leader Neil Kinnock told Bloomberg in an interview this week that his party needs room to maneuver to raise taxes if necessary.

This misunderstands the evolution in the economic position of both Starmer and his would-be finance minister Rachel Reeves over the past four years as they sought to transform Labor into an election-winning party, according to people close to them, who spoke as others. To Bloomberg for this story, he requested anonymity to discuss the party's internal thinking.

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The two politicians have moved away from Labour's typical approach of using tax and spending tools to redistribute wealth, towards a more nuanced view of the role of the state, people said. Instead – after receiving meetings with business leaders – they said they were prioritizing growth, investment and planning reform as a way to create a more equitable society.

“The tax burden is at its highest level in 70 years,” Reeves told Bloomberg at a campaign event this week. “We don't need higher taxes.”

One added that Starmer, for his part, had decided that a commitment to “wealth creation” should be the top line of the manifesto.

New Labour's thinking is reflected in its decision to rule out raising taxes on the “working class”. Labor has categorically said it will not raise income tax, National Insurance payroll tax, VAT or corporation tax – the Treasury's four biggest sources of revenue, which add up to around three-quarters of total revenue.

Labor officials said the promise was real and would not change. Starmer told Sky News on Wednesday that with the country still feeling the impact of the cost of living crisis, Britons were “adequately taxed already”.

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Labor aides admit they would first prefer to try to find savings in unprotected departments rather than raise taxes. At least one shadow cabinet team is prepared to take the fight to Reeves to avoid cuts to their department, one of the people said.

This does not mean that there will be no tax increases. Most Labor aides and lawmakers believe some of it is inevitable, though it would be better focused on unearned wealth and other limited areas. Reeves has previously proposed reforms to capital gains and council tax. Some aides said lower taxes could be considered on vices, carbon emissions, air pollution and narrow areas of wealth seen as excessive. They said there is an open question about whether there should be a number of smaller increases that add a lot of revenue, or one or two that focus on the wealthy.

Labor is also likely to borrow more if it is possible to do so within its fiscal rules, officials said. They said Starmer and Reeves were comfortable about borrowing – mainly to help stimulate private sector money flows – but also for state-backed investment.

Some Labor aides are also optimistic about interest rate cuts and that better-than-expected growth over the next year will reduce debt servicing costs, potentially giving them tens of billions of extra pounds.

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Labour's current economic thinking is a far cry from that of Starmer and Reeves just a few years ago. They have previously advocated wealth taxes and higher duties on dividends and high earners. They said they now see these policies as a greater threat to growth, seeing them as the primary way to raise wages, reduce inequality and raise revenue to spend on public services.

The new approach heralds difficult decisions in government, especially early on, which may be difficult for others in Labor to digest – although Starmer has said there will be no imposed austerity on departmental spending.

All of this points to a combination of three strategies in the early years of Starmer's project, one person said. These are: strict spending decisions that fall short of austerity, limited tax increases if necessary, and more borrowing if possible within the fiscal rules. This is a difficult balance to achieve without disturbing the party and the country. Economic growth is the perceived solution to raising revenues to spend on reforming public services, which is seen as a long-term goal. It remains to be seen whether it is a silver bullet or a distant mirage.

– With assistance from Ellen Milligan.

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