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Labour Says Tory ‘Unfunded’ Tax Plan Has Truss Parallels

(Bloomberg) -- Keir Starmer’s opposition Labour Party took aim at the UK government’s “unfunded” ambition to abolish the national insurance payroll tax, as it sought to turn the tables on the governing Conservative Party ahead of a general election that will be fought against the tightest of fiscal backdrops.

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Delivering his budget on Wednesday, Chancellor of the Exchequer Jeremy Hunt cut another two percentage points off the headline rate of national insurance, just as he did in November, and signaled the government’s ultimate goal is to abolish the tax entirely when conditions allow. His statement bore the hallmarks of the central promise in an election campaign manifesto.

Read more: Hunt Draws Election Battle Lines With Cuts to Spending and Taxes

The tax cut was designed to win over voters and jam Labour by taking two of its revenue-raising plans and diverting them to fund the tax cuts. But the budget also underscored the precariousness of the public finances, as Hunt struggled to find headroom for the pre-election giveaways demanded by his party.

Having faced months of accusations from Tory MPs about not having the money to fund its program for government, Labour spied an opening to hit back.

During her broadcast round on Thursday, Labour’s shadow chancellor Rachel Reeves said abolishing national insurance would cost the Treasury about £46 billion ($59 billion), and drew links to ex-Premier Liz Truss’s unfunded tax cuts that roiled financial markets in late 2022.

She also said the government’s choosing to adopt two of Labour’s revenue-raising policies — extending the windfall tax on energy firms and overhauling tax rules for foreigners — suggested Hunt has run out of road. Pointing to figures showing per person GDP is falling, she said it’s clear that what the chancellor called a “plan for growth” is not working.

“It is an utter humiliation for the government that in the final budget of this Parliament, they’ve had to resort to taking Labour ideas because they have run out of ideas of their own,” Reeves told Bloomberg TV.

The Conservatives countered that after adopting Labour’s policies, the opposition party should be made to show how it now plans to fund promises including, for example, more appointments in the National Health Service. It’s a tactic that led Labour to drop its commitment to spend £28 billion a year transitioning the UK to clean energy last month.

The argument is a forerunner for what is likely to be the fundamental question hanging over the election: do voters blame the Conservatives for the state of the economy and punish them by putting Labour in power for the first time in 14 years? Or do they gravitate toward Hunt’s emphasis on tax cuts?

To be sure, the question is more complicated. Labour has said it will keep Hunt’s 2 percentage-point reduction on national insurance, taking some of the sting out of his dividing line. At the same time, Reeves acknowledged that the Tory move onto Labour’s turf means it must find new ways to fund its plans, if as she said they will all be “fully costed” in the manifesto.

But what is clear is that whichever party wins the next election, Hunt’s budget will leave them walking a fiscal tightrope.

“This was not a budget which addressed the real challenges we are facing because it was not transparent about what those challenges are,” Institute for Fiscal Studies Director Paul Johnson said. “Government and opposition are joining in a conspiracy of silence in not acknowledging the scale of the choices and trade-offs that will face us after the election. They, and we, could be in for a rude awakening when those choices become unavoidable.”

He also said Hunt’s ambition to abolish national insurance is “not worth the paper it’s written on” without details on how the government could afford it.

The chancellor spoke with International Monetary Fund Managing Director Kristalina Georgieva after the budget on Wednesday. At a press briefing Thursday, IMF spokeswoman Julie Kozack described his tax raising measures as “well-conceived” but said more are needed.

“Significant spending to protect service delivery, growth-enhancing investments, and the appropriate commitment to stabilize debt are likely to require additional revenue-raising measures over the medium term,” Kozack said.

Despite falling short of what many Tory MPs wanted, Hunt effectively threw “caution to the wind” by leaving just £8.9 billion of headroom — the second smallest on record — against his key fiscal for debt to be falling as a percentage of gross domestic product at the end of a five-year forecast, the Resolution Foundation think tank said in its post-budget analysis.

It also pointed out that a net tax cut of £9 billion in the election year “is dwarfed by the estimated £27 billion of tax rises that came into effect last year and the £19 billion that are coming in after the election.” Pensioners, who are traditionally a core voting base for the Tories, are among the biggest losers of the budget, it said, because of the focus on tax cut for workers.

The budget left the UK with its highest tax burden since 1948, at 37.1% of GDP, according to an estimate by the UK’s fiscal watchdog, the Office for Budget Responsibility. A six-year freeze on income tax thresholds more than cancels out the reductions announced in national insurance contributions.

In a note to clients, economists at Citigroup said Hunt wasn’t really meeting his fiscal rules at all, and that he was actually “fiscally offside” by £50 billion to £60 billion. That’s because of a combination of what it sees as an overly optimistic productivity forecast from the OBR, and a set of undeliverable real terms cuts penciled into spending.

Hunt also acknowledged that some departments with unprotected budgets would face spending cuts after the election, though he didn’t specify which, given his plans only account for an 1% increase in public spending.

Cuts that severe are a “fiscal fiction,” said Torsten Bell, chief executive officer of the Resolution Foundation.

The political fallout from that dire picture will inevitably become the ground on which the general election is fought. Trailing Labour by about 20 points in national polls, Hunt is trying to shift the narrative toward tax cuts and making trouble for the opposition over its spending plans.

It wasn’t just Tory MPs who expressed disappointment. Bosses of London-listed companies told Bloomberg the budget represented a missed opportunity.

For Labour, the goal is to ensure voters don’t now shift tack and decide to give five more years to try to fix the problems that have developed on their watch. But they may not have expected Hunt to open up an attack line that is typically the Tories’ go-to line against Labour.

On Thursday, he appeared to walk back the ambition on national insurance. He told Sky News the move to cut employees’ contributions would encourage more people into work, and reduce unfairness for workers who already pay income tax. But he tried to cool expectations on how quickly it would be abolished.

“We’re not saying this is going to happen anytime soon,” Hunt told Sky News on Thursday. He said ending the “double tax” on workers may be “merging” national insurance and income tax, rather than getting rid of it entirely.

Speaking later on Times Radio, Reeves said Hunt was “floating ideas of £46 billion of tax cuts without even saying where the money’s going to come from.”

(Updates with IMF from 14th paragraph.)

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