Chancellor Rachel Reeves could raise taxes on wealth and inheritance by as much as £25 billion, according to a former Bank of England expert.
Increases in Capital Gains Tax and a ban on people passing on pension pots, businesses and agricultural land without paying inheritance tax are under consideration.
The government has signalled that it believes the state of public finances is much worse than expected with a black hole of £19 billion.
Rachel Reeves has asked departments to carry out a snap audit to understand the difference between the cost of providing essential services and the budgets drawn up by the last government.
Economist Michael Saunders, who is a former member of the Bank of England’s Monetary Policy Committee (MPC), predicts the Chancellor will present a worst case scenario in order to justify a ‘big bang’ increase in taxes.
The tactic would mirror the policy adopted by newly appointed chief executives in business, who tend to highlight all the horrors in the finances in year one and put the blame on their predecessors – something know as “kitchen sinking”.
Mr Saunders, who is now senior economic adviser at Oxford Economics, expects Reeves to “kitchen sink” all the bad news to “allow her to announce corrective measures to return the public finances to a sustainable path and blame it all on the failings of her Conservative predecessors.”
He suggested this would give her cover to announce £10 billion to £25 billion of tax rises, largely on wealth and inheritance, in a Budget this autumn.
Labour has argued that economic growth is central to its promises to improving the government’s finances and restoring public services. However, Mr Saunders said a growth windfall was unlikely for “several years.”
As a result, he believes Reeves will use the review of public finances to argue that there is no choice but to increase taxes and change government spending and debt rules.
Specifically, he said: “It is also worth considering a scenario in which the review is used to justify significant extra tax hikes, perhaps an extra £10 billion to £25 billion alongside a less aggressive squeeze on public spending and perhaps a tweak to the debt rule.
“This would be in addition to the revenue-raising measures in Labour’s manifesto, which were worth £8.6 billion per year.”
He said aligning Capital Gains Tax with income tax would raise £14 billion. Such a move would cost a higher rate taxpayer with a stocks and shares gain of £30,000 some £5,400.
At the same time another £3 billion could be raised by limiting inheritance tax relief on agricultural and business assets.
Stopping people passing on pension pots without paying income tax – if they die before the age of 75 – could raise another £1bn-£2bn a year in future years.
Further sums could be generated by expanding the number of people liable to pay National Insurance and extending the freeze on income tax thresholds for yet another year through to 2028-29.
Rachel Reeves has promised to level with the public about the “difficult decisions” that lie ahead since winning the election on July 4.
She has described the legacy of 14 years of Tory rule as the worst since the Second World War – with the national debt at its highest in over 60 years high, the tax burden last larger in the 1940s and public services on their knees.
Mr Saunders said the strategy of early tax hikes was adopted by Tony Blair’s first government and was followed by two further election victories. In 1997, Labour announced a surprise £5 billion tax hike on dividends that was not in its manifesto.
