Treasury Committee: Chancellor dismisses wealth tax and council tax reform
The Treasury Committee convened a series of hearings on April 1 and 2 to scrutinise the Spring Statement. These sessions featured evidence from the Office for Budget Responsibility (OBR), economic experts and the Chancellor herself. While the main topics were OBR forecasts and the government’s fiscal headroom, questions were also asked about potential future tax changes and the frequency of fiscal events, among other things.
The notes below focus primarily on the parts of the sessions relating to tax.
Tuesday 1 April (am) – Office for Budget Responsibility (OBR)
The first of the three sessions saw the committee take evidence from Richard Hughes, Chair of the OBR, and two members of the OBR’s Budget Responsibility Committee, Professor David Miles and Tom Josephs.
Responding to questions from Dame Harriett Baldwin (Conservative) about changes in the fiscal forecast, Tom Josephs said that increases in interest rates had been “by far the biggest factor that changed the fiscal forecast” but “the other important factor was that tax receipts this year have come in lower than we were expecting in October, particularly self-assessment corporation tax receipts.” He noted that because those taxes are paid with a lag, some of that actually relates to activity in the previous year, 2023-24, but he suggested that the weakness in corporation tax compared with previous expectations reflected a weaker economy and squeeze on profits: “That weakness essentially means that the starting point for the receipts forecast is lower and therefore reduces tax receipts across the forecast as well. There is a bit of an offset in the medium term, because nominal earnings have been a bit higher than we thought and therefore that increases the forecast of pay-as-you-earn receipts over the medium term.”
Read the full transcript of the session
Tuesday 1 April (pm) - Economists
The second session took evidence from Paul Johnson, Director, Institute for Fiscal Studies; Dr Jumana Saleheen, Chief Economist and Head of Investment Strategy Group, Europe, Vanguard Asset Management; and Ruth Curtice, Chief Executive, Resolution Foundation. For Johnson this was expected to be his final appearance before the committee before leaving the IFS to head up an Oxford college.
Asked for his analysis of “the productivity puzzle” Johnson identified, among other things, “the gross and continuing uncertainty in the tax system”. As he had said previously to the committee, increasing stamp duty land tax “will probably not help”.
Yuan Yang (Labour) asked the economists about the institutional framework that the OBR and the Treasury operate in. Saleheen said that promising just one fiscal event and then changing it creates uncertainty. Johnson said he had always been a believer that one fiscal event a year makes more sense. But he added that “the speculation about tax rises before the last Budget was very damaging economically, as well as, arguably, politically. I fear we will get that again.”
Asked by John Grady (Labour) about options for future fiscal changes, Curtice said that, on taxes, “at the Resolution Foundation we see scope to increase taxes in a way that would not significantly harm growth, certainly in the short term. The Chancellor did have the option, for example, to extend the threshold freezes, which would cost your constituents in the last two years of the forecast, but would not have cost them in the short term and would obviously have hurt wealthier households more.” She added later that tax is the area that the Chancellor should go to next, if she has to.
Johnson was asked by the chair where tax increases could potentially come from, given that the Chancellor has ruled out rises in a number of taxes. Johnson replied that it would not be easy: “Taxes are now pretty much at the highest level that they have been, but they are not coming from people on average or below average earnings. In fact, the average tax rate paid by those people—certainly in direct taxes—is well below where it was 30 years ago. Higher taxes are coming from a combination of very big increases in taxes on the highest earners, very big increases in corporation tax and company taxes, and increases in other, smaller taxes, such as property taxes.”
He noted that, if you look internationally at direct taxes, “all the countries that have higher tax burdens than us have higher taxes on average earners. That is not a politically easy issue, because there is a lot of pressure to get tax from the rich, get it from companies, or what have you. This month is the 50th anniversary of the last time that the basic rate of income tax was raised—by Denis Healey in 1975.”However, “If I were Chancellor and I did not have to be re-elected… I would be looking at things such as the basic rate of income tax.”
John Glen (Conservative) asked Johnson for his views on raising capital gains tax further. “I absolutely do not think that we should simply raise the rate, but we need a rebalancing of the base,” Johnson replied. “At the very least, you need to give allowance against inflation, but I would argue that it should be allowance against inflation plus a bit. If you do that, there is scope to increase the rate to something closer to the marginal income tax rate, but if you don’t change the base and just change the rate, you risk causing economic harm.”
Johnson noted that speculation about CGT had created behaviour change before the Budget, and so had speculation about pension taxation: “We know that a large number of people cashed in their pension earlier than they otherwise would have done because they were worried that the tax system would change. As it happened, the tax system didn’t change. I think the Chancellor should rule out any further change in pension taxation in this Parliament. Otherwise, we will get the same impact before the next Budget.”
Read the full transcript of the session
Wednesday 2 April – HM Treasury (Chancellor and officials)
The third and final Spring Statement hearing saw chancellor Rachel Reeves joined by two senior Treasury officials: Louise Tinsley, Director of Labour Markets and Welfare, and William Macfarlane, Director of Strategy, Planning and Budget.
Bobby Dean (Lib Dem) observed that committing to one fiscal event a year, defined as making adjustments to tax, but receiving two forecasts, could mean that, to make sure she maintains her fiscal rules, the chancellor ‘has one hand tied behind her back’ by not being able to pull the tax lever as well as the spending lever.
“It is really important that we have just one major fiscal event a year, because families and businesses do crave stability,” replied the chancellor. “In the last Parliament, there were a huge number of fiscal events, mini and otherwise, and that constant chopping and changing of tax rates and thresholds contributed to the economic uncertainty and volatility of that period, which had a direct impact on business confidence and consumer confidence. That is why we have made the decision as a government to have just one major fiscal event a year.”
John Glen pressed the chancellor to rule out further tax increases. The chancellor replied that she said in the Budget that it was “a once-in-a-Parliament Budget to wipe the slate clean after the economic mismanagement of the previous administration”. Pressed to commit, she said she was “not going to write another four years’ worth of Budgets—that would not be responsible—but I can assure the committee that I will not need to repeat a Budget on that scale because we have now wiped the slate clean and put our public finances on a firm footing.”
John Grady questioned the chancellor on two tax reforms that were being suggested: “The first suggestion is a wealth tax, which would take time and would be complicated to implement. What are the Treasury’s thoughts on a wealth tax at the minute?”
The chancellor told Grady that the government had already increased taxes on the most wealthy: “The reforms to the non-dom tax status will bring in £12 billion during the course of this Parliament. VAT on private schools will bring in £9 billion during the course of this Parliament. The energy profits levy on the large profits that the energy companies are making—£2.3 billion. The higher rate additional dwelling on stamp duty land tax—£1.2 billion. The capital gains tax increase—£8.9 billion. The inheritance tax changes—just over £5 billion. The point is that these taxes, by their nature, fall on wealthy people. My argument would be that we did already significantly increase taxes on the wealthiest in the Budget last year. Now the focus has to be on growing the economy, and reform of public services, as well as spending wisely the additional investment, including the £25 billion into the NHS in this Parliament.”
Grady then turned to council tax reform, either in the form of revaluation or additional bands. The chancellor said the government had resisted calls from most councils wanting to increase their council tax significantly, “because we recognise the ongoing pressures on living standards and the cost of living crisis that people have gone through”. More fundamental reform “is not something that we are looking at at the moment”, she added.