On 28 October, John Healey will deliver the Burnham government’s first Budget. Advance briefing has promised a “steady-as-she-goes” approach that defers key fiscal choices. This, we believe, would be a missed opportunity for a new administration that has vowed to learn from Labour’s past mistakes.
Below, Arguably contributors and policy experts outline 10 measures the Chancellor could take to boost economic growth, living standards and fiscal stability.
Remove the tax cliff edges that penalise work
One of the basic principles of a just taxation system is to incentivise work. Britain, however, has contrived to develop a model unusually good at doing the reverse – at both ends of the income spectrum.
The Carer’s Allowance (worth £4,495 a year), paid to those who spend at least 35 hours a week caring for someone with a disability, is withdrawn entirely after £10,192, meaning that a carer able to obtain extra hours, a pay rise or a promotion can be left financially worse off. Meanwhile, someone who earns over £100,000 not only has the personal allowance of £12,570 tapered away, creating an effective 62p marginal rate, but also loses their entitlement to 30 hours of free childcare and to tax-free childcare (worth up to £2,000 per child).
The distortions that result are, as the IFS has put it, “among the most severe you will ever see within a tax and benefit system” or, more bluntly, “absolutely insane”. A parent with two children, it estimates, needs to earn £137,000 outside London or £149,000 inside the capital before they are better off in cash terms than when they earned £99,000. Thousands of employees are now declining promotions and cutting their hours, while doctors turn down extra shifts, harming the growth and public services that we depend on.
Fixing these distortions should be a priority for John Healey – and the Centre for British Progress has offered costed solutions. The childcare cliff edge could be replaced with a less punitive 3% surtax above £100,000 for each child benefiting from subsidies. This, it estimates, would raise up to £700m by encouraging workers to take on more employment – almost enough to cover the cost of fixing some of the worst distortions in our tax system.
The 62% tax rate would be cut to 54% by extending the taper range to £155,000 and the High Income Child Benefit Charge would be similarly reduced from 53% for two children to 48% by extending the taper range, currently £60,000 to £80,000, to £100,000. And the Carer’s Allowance cliff edge could be replaced by a taper rate of 55% (a static cost of just £101m) or one of 25% (costing £277m).
A midterm Budget is precisely the moment for a government to enact radical tax reform, and Healey can make an impeccably Labour argument: work should always pay, for high and low earners alike.
George Eaton is editor-in-chief and co-founder of Arguably
Tax autonomous vehicles before they go mainstream
Motoring taxes raise about £33bn a year. That’s more than stamp duty, inheritance tax and air passenger duty combined. But this revenue stream is about to shrink as its largest component, fuel duty, is hit by the switch to electric vehicles. Indeed, the Office for Budget Responsibility cites fuel duty revenue loss as the biggest fiscal hit from the net zero transition.
Meanwhile, the costs of congestion are about to go up. Autonomous vehicles bring huge benefits – particularly for those in remote areas, those with disabilities, or anyone who cannot drive. However, they will also substantially increase the amount of traffic on the road. Why? Because driverless cars reduce the marginal cost of driving to zero. Currently, driving comes with either a time cost (you have to focus on the road) or a financial cost (you pay someone else to focus on the road). While the technology is currently quite expensive, the cost is falling rapidly.
Waymo, a robotaxi operator in California, recently admitted that its autonomous vehicles are empty for nearly half their mileage. The Department for Transport estimates that automation could increase traffic by 24%, at a time when London is trying to cut traffic by a tenth. In areas of high congestion, which is most of our city centres, this could lead to gridlock.
The solution is a surcharge on autonomous vehicles. This could be charged per mile or per minute (the former is easier to implement, the latter better targets traffic), and set at a rate which covers the economic cost of congestion – which is substantial. Revenue raised can go towards reskilling taxi and private hire drivers, funding local transport infrastructure, and maintaining roads.
The Chancellor should move quickly on this, and get ahead of the issue before self-driving cars go mainstream. This leaves little time. Waymo is currently testing driverless cars in London for a launch next year. Uber and Wayve have already started offering customers autonomous rides – albeit currently with a driver for safety purposes.
This has immediate benefits. Bond markets reward long-term fiscal revenue streams now, through longer-dated gilt yields, and cheaper borrowing costs improve government headroom. By 2050, we estimate the charge would raise about £47bn a year, close to what council tax raises today. The time to move is now.
David Lawrence is co-founder of the Centre for British Progress and an Arguably columnist
Stop giving crypto a tax break
Britain’s tax system gives cryptocurrency a break it hasn’t earned and doesn’t deserve. Income from cryptocurrency investment is charged at 24% under capital gains tax (CGT) rather than 45% under income tax. That’s a luxury designed to encourage productive investment in business and job creation. Crypto earnings do neither – they just extract money from the real economy.
Denmark categorises crypto as ‘speculative trading’ and applies income tax rather than CGT. It’s a popular revenue-raising approach and Denmark’s Tax Law Council wants to go further still – taxing cryptocurrency gains regardless of whether they have been sold.
Mirroring Denmark’s approach would encourage crypto traders to redirect investments to more pro-growth purposes and generate £250m in revenue, largely paid by a tiny pool of very wealthy traders. In 2023-24, just 240 people banked over half of all crypto gains, with sales averaging £31m each.
The revenue could help fund the government’s VAT cut on household electricity bills (£850m). That’s significant because global Bitcoin mining uses more electricity than all UK households – and the latter are far more deserving.
Taxing extractive sectors is popular with the public. Our polling shows that half of Britons think taxing crypto to pay for the electricity VAT cut would make the tax system fairer, including Reform voters (+25%) and Conservatives (+36%).
Disincentivising electricity for cryptomining to incentivise electricity for UK households is a good tax story. Reserving tax incentives for investment that benefits us all is the right thing to do.
Polly Curtis is chief executive of Demos
Reform the fiscal rules to boost infrastructure
Do you remember Labour’s flagship state-backed new towns programme? Have you noticed that it’s all gone a little quiet on that front? A central obstacle, as ever, is money. In Britain today, investing in infrastructure such as housing is made incredibly difficult by the binding rules that the Treasury operates under.
The current fiscal framework mandates that public sector net financial liabilities must fall as a share of GDP by 2029-30, sharply restricting the amount the government can borrow to invest. This inhibits the “spend to save” model that Andy Burnham has advocated by counting borrowing against the rule even where income streams (e.g. housing rents) can help repay it.
An alternative approach, as the Centre for Cities has advocated, would be to bring the UK into line with European fiscal standards by excluding non-financial public corporations from the debt rule. This would give council-owned housing companies, as in France and Finland, greater scope to build by borrowing against future rental income.
Based on current rates, Labour will fall more than 500,000 homes short of its target to build 1.5 million homes by the end of the parliament, hindering economic growth and further inflating the housing benefit bill (now £37.3bn). Removing the self-imposed fiscal straitjacket that suppresses investment could be part of the answer.
Vicky Spratt is housing and society correspondent at The i Paper and the author of Tenants and the forthcoming We Were Promised The Moon
Make it less expensive to hire young people
Opportunity. That word should breathe fire into the belly of the progressive. A dynamic private sector is where it’s made – the first job, the career change, the step off welfare – enabled by a state that creates the conditions for investment and risk-taking. Removing the layers of treacle poured onto it should be at the heart of this Budget.
It starts with making that first opportunity cheaper to create. In a decade, the real cost of employing an 18-year-old has risen by 40%. GDP per head? 7%. Alan Milburn’s diagnosis of the NEETs crisis has been exceptional, and a worthy response must address the supply of opportunity as well as demand for it. We can’t keep paying firms to hire young people while making hiring dearer. The oft-admired Netherlands – with a NEET rate of 4% to our 13% – pays 18-year-olds half the adult minimum wage rate but in Britain the Low Pay Commission is set on closing the gap. The Chancellor should pause this convergence and phase in employer National Insurance through a worker’s early 20s rather than imposing the full rate on their 21st birthday. Harder politics, yes, but I’d take a real job at a lower rate over a non-existent one at a higher rate any day (and so would the 84% of NEETs who say they want one).
Then ungum the top of the labour market while protecting insecure workers. Scrap non-competes and relax enhanced workers’ rights for higher earners. Neither costs a penny. From January, six months’ service buys unfair-dismissal rights for everyone from a trainee barista to an overpaid think-tank executive. Labour doesn’t exist to make six-figure earners harder to fire. But a Labour government can make them easier to hire and freer to move. That’s one way opportunity gets made in a country starved of it.
Ryan Wain is senior director of policy and politics at the Tony Blair Institute
Introduce local work visas for mayors
The Budget should give combined-authority mayors the power to create local work visas for recent university graduates, allowing them to retain international students and other young skilled workers.
The current system is excessively centralised. National salary thresholds and occupation rules take little account of differences in local labour markets, wage levels or growth strategies. A job paying £32,000 may be entirely viable and productive in Sheffield or Newcastle, even if it falls below a threshold designed around national or London wages, while the impact of new migrants on housing markets or local services will vary.
Mayors should therefore be allowed to sponsor a limited number of recent graduates who have studied in the UK, have a job offer in their region and meet locally determined salary or skills criteria. Visas could initially be tied to employment within the relevant combined authority, with a route into the national Skilled Worker system after two or three years.
This would have several advantages. It would help cities retain young, educated workers who are already here, speak good English and are likely to integrate easily into the UK labour market; support local employers facing recruitment constraints; and generate additional income tax and National Insurance revenues with relatively limited demands on public services.
There is also a wider principle at stake. If the government is serious about devolution and local growth, mayors should have some influence over one of the most important determinants of their labour supply.
Immigration policy need not mean choosing between a single national target and an uncontrolled system. Limited, accountable local flexibility would be both more economically rational and more consistent with devolution.
Jonathan Portes is professor of economics and public policy, King’s College London
End billions in losses from QE
The government has a problem: the Bank of England. The taxpayer is spending around £18bn a year covering losses from the Bank’s quantitative easing programme, roughly comparable to the Home Office’s annual budget. This is public money that is not being invested, not helping households with the cost of living and not improving our public services. Instead, it is being funnelled to the shareholders of commercial banks.
There are two ways to fix this. Option one: the Treasury could introduce a Thatcher-style reserves income levy on commercial banks to claw back some of these funds. This need not be permanent. The levy could fall automatically with interest rates, disappearing once the Bank no longer makes significant interest-rate losses on QE.
Ending this subsidy (and quantitative tightening) could save £7bn a year while still leaving banks with substantial profits. However, it would not please bank shareholders and could dent market confidence. The economics are sound, but the vibes could be bad.
So here’s option two: defer the losses. The government could save £5bn a year by reforming the indemnity between the Treasury and the Bank. The UK is an international outlier in having its Treasury pay for its central bank’s losses. In the US, Federal Reserve losses aren’t refunded quarterly by the Treasury. Instead, the Fed records a ‘deferred asset’ and stops sending profits to the Treasury until future earnings have paid off the loss.
There is a trade-off. This option would mean less future income from the Bank, and it would not substantially change the ultimate cost to the taxpayer (simply spreading it over time). But it would likely be better received by markets.
Neither option is cost-free. But staying as we are now is a choice too, and a worse one. When the government is searching down the back of the sofa to pay for urgent priorities, it’s time to stop writing multi-billion-pound cheques to cover failings in how QE was designed.
Harry Quilter-Pinner is executive director of IPPR
Create a Targeted Energy Discount for poorer families
Amid the debate around cost-of-living support ahead of the Budget, one number should focus minds on what to target – £2,137. That’s the implied Energy Price Cap this January should the Bank of England’s latest forecast materialise.
Another number that should inform debate is £44bn. That’s the cost of Liz Truss’s wasteful universal energy subsidy in 2022, which helped better-off families the most.
Instead, support should be targeted at poorer households who suffer the most from high energy bills. Since the start of the cost-of-living crisis, poorer neighbourhoods have turned off the heating more despite having less room to cut. The easiest way to deliver support is through the benefits system. But this would exclude too many vulnerable families on modest incomes who don’t receive Universal Credit.
Instead, we propose a new Targeted Energy Discount (TED) for any household where no one has an income higher than £24,000. A scheme costing £2bn annually would reach two in five families and provide an average discount of £175 – far more than the £60 saving from the similarly sized 5% VAT cut on electricity bills for all households.
A TED should be activated on a quarterly basis when the price cap is high, so it can be switched on and off. This is key as politics has a habit of making temporary schemes permanent. The VAT cut on electricity bills risks becoming the new fuel duty freeze (‘temporary’ for 15 consecutive years now).
The government should design a TED now to announce at the Budget. There are real data challenges in doing so, but if we can design a £70bn furlough scheme in weeks, we can design a TED in time to switch on in January.
Ruth Curtice is chief executive of the Resolution Foundation
Let mayors pursue Regionally Significant Infrastructure Projects
One song we didn’t hear belting out from the mayors’ DJ set at Labour Party conference was ‘Stuck in the Middle With You’, but that’s exactly what is happening to infrastructure projects that are too big for the town hall, but too small for Whitehall.
The Good Growth Foundation’s ‘Good Growth Budget’ has a fix, and it comes with an acronym worth learning: RSIPs – Regionally Significant Infrastructure Projects.
Schemes too big for a council but too small to count as Nationally Significant Infrastructure Projects fall into a gap. They go to the local authority first, and a mayoral call-in can add months of delay. RSIPs would give mayors their own direct approval route, mirroring the national process but with lower thresholds and a new approach to discharging environmental duties at regional level. Think smaller reservoirs, sports stadiums, transport hubs or even data centres. Pair it with fiscal devolution and you give places the power and a reason to go for growth, rather than blocking it.
And the work shouldn’t all go to the usual giants. The same Budget would make reserving smaller public contracts for UK SMEs the default, worth around £1bn, and require bigger contracts to be broken into lots that local firms can actually bid for. More projects approved locally, more of them built by local businesses, more of the benefit felt there. That is local good growth.
So for next year’s DJ set, when RSIPs have been adopted, I reckon the mayors can play a Daft Punk classic because they will be building, and growing ‘Harder, Better, Faster, Stronger’.
Praful Nargund is director of the Good Growth Foundation
Reform PIP to prioritise severe needs
There are widespread calls to reform Personal Independence Payment (PIP) – the UK’s main disability benefit. The government’s own review, led by Stephen Timms, describes it as “no longer fit for purpose”.
The rapidly rising cost of working-age disability benefits – from £14bn in 2019-20 to around £25bn today – is a strain on the public finances. The cost is forecast to rise by another £9bn by the end of the decade – not far off the £11bn price tag for increasing defence spending to 3% of GDP.
But there is no consensus on how to reform PIP or even on whether the overall bill should be reduced. One reform option – among very many – would be to link benefits more closely to the severity of a person’s disability.
At present, people with very different needs get the same benefits. For example, someone unable to wash themselves and needing help dressing their upper body would receive the maximum, ‘enhanced’, daily living award of £5,960 per year. The same amount is given to someone unable to wash or dress themselves at all, unable to communicate verbally, and needing prompting to understand basic written information.
Broadly, and for any level of overall spending, a reform that tilted PIP towards people with severe needs, as measured by the current assessment, would tend to benefit younger claimants and those with learning disabilities, autism or cerebral palsy. It would tend to be less generous to older claimants and those with arthritis or back pain.
This illustrates a choice at the heart of PIP debates: for any overall budget, providing more support for some people means less for others. There is no change to PIP’s structure or to the assessment process that can remove that trade-off.
Helen Miller is director of the Institute for Fiscal Studies