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Faced with a challenging set of numbers, the chancellor is having to make difficult choices with political consequences.
Tax rises and spending cuts are a hard sell.
Now, some in her party are calling for a different approach: target the wealthy.
Is there a way out of all of this for the chancellor?
Economic growth is disappointing and spending pressures are mounting. The government was already examining ways to raise revenue when, earlier this month, Labour backbenchers forced the government to abandon welfare cuts and reinstate winter fuel payments – blowing a £6bn hole in the budget.
The numbers are not adding up for Rachel Reeves, who is steadfastly committed to her fiscal rules. Short of more spending cuts, her only option is to raise taxes – taxes that are already at a generational high.
For some in her party – including Lord Kinnock, the former Labour leader, the solution is simple: introduce a new tax.
They say a flat wealth tax, targeting those with assets above £10m, could raise £12bn for the public purse.
Yet, the government is reportedly reluctant to pursue such a path. It is not convinced that wealth taxes will work. The evidence base is shaky and the debate over the efficacy of these types of taxes has divided the economics community.
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Chancellor will not be drawn on wealth tax
Why are we talking about wealth?
Wealth taxes are in the headlines but calls for this type of reform have been growing for some time. Proponents of the change point to shifts in our economy that will be obvious to most people living in Britain: work does not pay in the way it used to.
At the same time wealth inequality has risen. The stock of wealth – that is the total value of everything owned – is much larger than our income, that is the total amount of money earned in a year. That disparity has been growing, especially during that era of low interest rates after 2008 that fuelled asset prices, while wages stagnated.
It means the average worker will have to work for more years to buy assets, say a house, for example.
Left-wing politicians and economists argue that instead of putting more pressure on workers – marginal income tax rates are as high as 70% for some workers – the government should instead target some of this accumulated wealth in order to balance the books.
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Lord Kinnock calls for ‘wealth tax’
The Inheritocracy
At the heart of it all is a very straightforward argument about fairness. Few will argue that there aren’t problems with the way our economy is functioning: that it is unfair that young people are struggling to buy homes and raise families.
Proponents of a wealth tax say that it would not only raise revenue but create a fairer tax system.
They argue that the wealth distortions are creating a divided society, where people’s outcomes are determined by their inheritances.
The gap is large. A typical 50-year old born to the poorest 20% of parents in the UK is already worth just a quarter of what someone born to the richest 20% of parents is worth at that age. This is before they inherit anything when their parents die.
A lot of money is passed on earlier; for example, people may have had help buying their first home. That gap widens when the inheritance is passed on. This is when inheritance tax, one of the existing wealth taxes we have in the UK, kicks in.
However, its impact in addressing that imbalance is negligible. Most people don’t meet the threshold to pay it. The government could bring more people into the tax but it is already a deeply unpopular policy.
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Former BP boss: Wealth tax would be ‘mistake’
Alternatives
So what other options could they explore?
Lord Kinnock recently suggested a new tax on the stock of wealth – one to two percent on assets over £10m. That could raise between £12bn and £24bn.
When making the case for the tax, Lord Kinnock told Sky News: “That kind of levy does two things. One is to secure resources, which is very important in revenues.
“But the second thing it does is to say to the country, ‘we are the government of equity’. This is a country which is very substantially fed up with the fact that whatever happens in the world, whatever happens in the UK, the same interests come out on top unscathed all the time while everybody else is paying more for getting services.”
However, there is a lot of scepticism about some of these numbers.
Wealthier people tend to be more mobile and adept at arranging their tax affairs. Determining the value of their assets can be a challenge.
In Downing Street, the fear is that they will simply leave, rendering the policy a failure. Policymakers are already fretting that a recent crackdown on non-doms will do the same.
Critics point to countries where wealth taxes have been tried and repealed. Proponents say we should learn from their mistakes and design something better.
Some say the government could start by improving existing taxes, such as capital gains tax – which people pay when they sell a second property or shares, for example.
The Labour government has already raised capital gains tax rates but bringing them in line with income tax could raise £12bn.
Then there is the potential for National Insurance contributions on investment income – such as rent from property or dividends. Estimates suggest that could bring in another £11bn.
This is nothing to sniff at for a chancellor who needs to find tens of billions of pounds in order to balance her books.
By the same token, she is operating on such fine margins that she can’t afford to get the calculation wrong. There is no easy way out of this fiscal bind for Rachel Reeves.
Whether wealth taxes are the solution or not, hers is a government that has promised reform and creative thinking. The tax system would be a good place to start.
Pressure is growing to renegotiate or leave an international convention blamed for slowing building projects and increasing costs after a judge warned campaigners they are in danger of “the misuse of judicial review”.
Under the Aarhus Convention, campaigners who challenge projects on environmental grounds but then lose in court against housing and big infrastructure have their costs above £10,000 capped and the rest met by the taxpayer.
Government figures say this situation is “mad” but ministers have not acted, despite promising to do so for months.
The Tories are today leading the call for change with a demand to reform or leave the convention.
In March, Sky News revealed how a computer scientist from Norfolk had challenged a carbon capture and storage project attached to a gas-fired power station on multiple occasions.
Andrew Boswell took his challenge all the way the appeal court, causing delays of months at a cost of over £100m to the developers.
In May, the verdict handed down by the Court of Appeal was scathing about Dr Boswell’s case.
“Dr Boswell’s approach is, we think, a classic example of the misuse of judicial review in order to continue a campaign against a development… once a party has lost the argument on the planning merits,” wrote the judges.
They added: “Such an approach is inimical to the scheme enacted by parliament for the taking of decisions in the public interest,” adding his case “betrays a serious misunderstanding of the decision of the Supreme Court” and “the appeal must therefore be rejected”.
Another case – against a housing development in a series of fields in Cranbrook, Kent – was thrown out by judges in recent weeks.
The case was brought by CPRE Kent, the countryside challenge, to preserve a set of fields between two housing developments alongside an area of outstanding natural beauty.
John Wotton, from CPRE Kent, suggested it would have been hard to bring the challenge without the costs being capped.
“We would’ve had to think very carefully about whether we could impose that financial risk on the charity,” he told Sky News.
After his case was dismissed, Berkeley Homes said the situation was “clearly absurd and highlights how incredibly slow and uncertain our regulatory system has become”.
They added: “We welcome the government’s commitment to tackle the blockages which stop businesses from investing and frustrate the delivery of much needed homes, jobs and growth.
“We need to make the current system work properly so that homes can actually get built instead of being tied-up in bureaucracy by any individual or organisation who wants to stop them against the will of the government.”
‘Reform could breach international law’
Around 80 cases a year are brought under the Aarhus Convention, Sky News has learned.
The way Britain interprets Aarhus is unique as a result of the UK’s distinctive legal system and the loser pays principle.
Barrister Nick Grant, a planning and environment expert who has represented government and campaigns, said the convention means more legally adventurous claims.
“What you might end up doing is bringing a claim on more adventurous grounds, additional grounds, running points – feeling comfortable running points – that you might not have otherwise run.
“So it’s both people bringing claims, but also how they bring the claims, and what points they run. This cap facilitates it basically.”
However, Mr Grant said that it would be difficult to reform: “Fundamentally, the convention is doing what it was designed to do, which is to facilitate access to justice.
“And it then becomes a question for the policymakers as to what effect is this having and do we want to maintain that? It will be difficult for us to reform it internally without being in breach of our international law obligations”
In March, Sky News was told Number 10 is actively looking at the convention.
Multiple figures in government have said the situation with Britain’s participation in the Aarhus Convention is “mad” but Sky News understands nothing of significance is coming on this subject.
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‘The country faces a choice,’ says Robert Jenrick
The Tories, however, want action.
Robert Jenrick, shadow justice secretary and former housing minister, said the Tories would reform or leave the convention.
He told Sky News: “I think the country faces a choice. Do we want to get the economy firing on all cylinders or not?
“We’ve got to reform the planning system and we’ve got to ensure that judicial review… is not used to gum up the system and this convention is clearly one of the issues that has to be addressed.
“We either reform it, if that’s possible. I’m very sceptical because accords like this are very challenging and it takes many many years to reform them.
“If that isn’t possible, then we absolutely should think about leaving because what we’ve got to do is put the interest of the British public first.”
Mr Jenrick also attacked the lawyers who work on Aarhus cases on behalf of clients.
“A cottage industry has grown. In fact, it’s bigger than a cottage industry,” he said.
“There are activist lawyers with campaign groups who are now, frankly, profiteering from this convention. And it is costing the British taxpayer a vast amount of money. These lawyers are getting richer. The country is getting poorer.”
It would have been “politically impossible” to stop President Bush from invading Iraq, as he believed he was on a “crusade against evil”, new records show.
Newly declassified UK government files show Sir Tony Blair was warned by his US ambassador that George W Bush was determined to overthrow dictator Saddam Hussein, in the months before the invasion of Iraq.
Sir Tony, who was prime minister at the time, was trying to encourage the US president to use diplomatic means to change the situation in the Middle Eastern country, and flew to Camp David in January 2003 to make the case, just two months before the joint US-UK invasion.
The UK government was also hoping the United Nations Security Council would agree a new resolution specifically authorising the use of military force against Iraq.
But the files, made public for the first time, show that Sir Tony’s ambassador, Sir Christopher Meyer, warned him it would be “politically impossible” to sway Mr Bush away from an invasion unless Hussein surrendered.
Prime Minister Tony Blair with US President George W Bush in 2003
The documents, released by the National Archives at Kew in west London, show Sir Christopher also wrote that Mr Bush believed himself to be on “a crusade against evil to be undertaken by God’s chosen people”.
Sir Tony’s foreign policy adviser, Sir David Manning, told the PM that when he met Mr Bush, he should make the point that a new diplomatic resolution was “politically essential for the UK, and almost certainly legally essential as well”.
But the White House was becoming increasingly impatient at the unwillingness of France and Russia – both of whom held a veto – to agree a resolution so long as UN inspectors were unable to find any evidence of Iraqi weapons of mass destruction, the supposed justification for war.
Sir Christopher warned Sir Tony shortly before his visit to see Mr Bush in January 2003 that options for a peaceful solution in Iraq had effectively run out.
Tony Blair speaking at a press conference following talks over Iraq in March 2003, watched on by George Bush and the leaders of Spain and Portugal
He wrote: “It is politically impossible for Bush to back down from going to war in Iraq this spring, absent Saddam’s surrender or disappearance from the scene.
“If Bush had any room for manoeuvre beforehand this was closed off by his State of the Union speech.
“In the high-flown prose to which Bush is drawn on these set-piece occasions, he said in effect that destroying Saddam is a crusade against evil to be undertaken by God’s chosen people.”
Saddam Hussein in 2001 – he was captured by US soldiers in December 2013
In a cable sent the previous month, Sir Christopher said that much of the impulse for deposing Hussein was coming from the president, a born-again Christian, who was scornful of what he saw as the “self-serving” reservations of the Europeans.
“His view of the world is Manichean. He sees his mission as ridding it of evil-doers. He believes American values should be universal values,” Sir Christopher stated.
“He is strongly allergic to Europeans collectively. Anyone who has sat round a dinner table with low-church Southerners will find these sentiments instantly recognisable.”
In the end, Sir Tony and Mr Bush abandoned efforts to get a new Security Council resolution, blaming French President Jacques Chirac for refusing, and launched the invasion of Iraq anyway.
Lobbying from Mandelson and anger at the French
Among the new files, there are also a number of other revelations. These include:
- Current UK ambassador to the US, Sir Peter Mandelson, was so desperate to get back into government following his second resignation from Sir Tony’s government that he asked Lord Birt, a policy adviser to Downing Street, to write to the prime minister in 2003, asking for him to receive a role – four months before Sir Peter was appointed as the UK’s next European commissioner
- Sir Tony was furious at French president Jacques Chirac’s efforts to undermine pressure being put on Zimbabwean dictator Robert Mugabe by the UK in 2003, over growing violence caused by a policy of driving the remaining white farmers from their lands in the African nation
- The prime minister also insisted on changing the rules around which parties can lay wreaths at the Cenotaph on Remembrance Sunday in a bid to protect the Northern Irish peace process in 2004, despite warning this could create an “adverse reaction” from the SNP and Plaid Cymru
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