Rachel Reeves is expected to start preparing the nation for tax rises by claiming she inherited a £20 billion funding gap from the Tories
By Will Hazell, POLITICAL CORRESPONDENT27 July 2024 • 10:30pm
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The Treasury has drawn up plans to equalise capital gains tax with income tax, The Telegraph can reveal.
Civil servants will present the proposals to the Chancellor Rachel Reeves, who in a speech on Monday is expected to prepare the nation for tax rises by claiming she inherited a £20 billion funding gap from the Conservatives.
Cutting pension tax relief for middle-class workers is another option set to be presented to Ms Reeves, who will announce timings for the next Budget, when any tax rises will be announced.
Downing Street said that the Treasury assessment of the nation’s finances will “show that Britain is broke and broken”.
Ms Reeves will accuse Jeremy Hunt of presiding over a “cover-up” of the “dire state” of public finances.
She added: “If we cannot afford it, we cannot do it.
“People up and down our country will understand that. When household budgets are stretched, families have to make difficult choices. And government needs to do the same.”
An inflation-busting pay rise for public sector workers of 5.5 per cent, expected to be announced by Ms Reeves on Monday, accounts for as much as £8 billion of the funding gap.
Mr Hunt, the shadow chancellor, disputed the Government’s claims about the dire state of the economy, warning that raising taxes would amount to “the biggest betrayal” ever by a Chancellor in their first Budget.
He told The Telegraph: “If having deliberately not told the country what they were planning before the election they then put up taxes, it will be the biggest betrayal by a Chancellor in her first budget that we have ever seen.”
Mr Hunt added that Labour would “not have the legitimacy or the mandate to increase taxes, because they weren’t honest with us before the election that that was what they wanted to do”.
He branded the Treasury’s audit a “purely political exercise” designed to provide a pretext for tax rises in the autumn, which can be blamed on the Conservatives.
The Telegraph understands that the Treasury will present Ms Reeves with options to equalise CGT and income tax rates and to cut pension tax relief for middle-class workers.
The highest rate of CGT is 28 per cent – far lower than the top rate of income tax of 45 per cent – and Ms Reeves was careful not to rule out increasing CGT during the election. One study suggested that equalising the rates would raise £16.7 billion a year, although it did not account for how such an increase to CGT would affect tax planning.
Pension contributions are currently tax deductible, meaning basic rate payers get a relief equal to 20 per cent of their payments to cancel out the income tax that would be otherwise due, while higher rate and additional rate payers get reliefs of 40 per cent and 45 per cent, respectively.
Civil servants previously made the case for introducing a flat rate of 30 per cent, which would leave higher and additional rate payers facing an effective 10 per cent or 15 per cent charge.
The Institute for Fiscal Studies had said that such a flat rate would bring in the equivalent of £2.7 billion.
Mr Hunt said that he thought Labour would “look at equalising CGT with income tax rates, and removing the higher rate relief on pensions contributions”, revealing that Treasury officials had presented these options when he was preparing for the 2022 Autumn statement as chancellor.
Ms Reeves is also expected to delay a series of road and new hospital projects.
Downing Street last night blamed “populist politics” for a litany of problems.
Writing in The Telegraph, Pat McFadden, the Chancellor of the Duchy of Lancaster, said the “shocking” findings of the Government’s audit included “public services crumbling, announcements without proper funding and long-term spending pressures piling up”.
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