If Labour want a fairer society, they must argue for it

Labour must make the political argument: taxes are the critical downpayment we all pay to live in a fairer society.

 It now seems all but certain that direct taxes will rise in the forthcoming Budget on November 26. Rachel Reeves and Keir Starmer at last appear willing to act boldly, signalling that they will break with the commitment in the 2024 manifesto not to raise the basic or higher rate of income tax. Taking the decision on tax, however, is not enough. Still absent is a clear narrative about the purpose of this tax hike. The government desperately needs such a story if it is to maximise what remaining chances it has for long-term political success.

 So far, the pre-Budget debate has focused more on whether the government should break the pledge. The political case for raising taxes at all is undeniably tough, even more so if government explicitly breaches its 2024 manifesto. There will be, without question, a very hostile reaction. Ministers' promises not to raise direct taxes at the last election will be replayed endlessly. Every media interview will be a fraught confrontation.

 We shouldn’t be surprised, then, that some government advisors are reportedly arguing for keeping to the letter of the manifesto pledge as much as possible. They advocate a ‘smorgasbord’ of smaller tax rises to make up the missing ‘headroom’. Yet, the obvious danger is that cobbling together a ragtag of tax hikes will alienate vocal interest groups, absorb government attention, and only just create sufficient fiscal headroom. To reduce the risk of another tax rising Budget in 2026, more ambition is required. In contrast, direct taxes reliably raise significant revenue. Estimates vary but a 2p increase in the basic rate alone would yield up to £20 billion by 2028-29. Even if Labour also cut National Insurance for lower earners on grounds of intergenerational fairness, as recent reports strongly suggest they will, they could raise up to £11bn a year.

 If the government has decided to breach its manifesto, the next step is to explain why to a sulphurous traditional media, an anarchic social media, and an angry electorate. Right now, the government’s justification for breaching a manifesto promise is a blend of fiscal technocracy and Tory-bashing. That will not be enough.

 The government’s argument has a logic to it. The UK is in a fiscal bind due to higher debt interest payments, volatile gilt markets, and sticky inflation accompanied by harsh global headwinds. In her pitch-rolling Downing Street address, Reeves defined the purpose of tax rises as securing ‘more resilient public finances with the headroom to withstand global turbulence’. She simultaneously disavowed the alternative seen in the 2010s: a return to ‘austerity’ in public spending and investment.

 She is correct that the UK government cannot safely increase borrowing beyond current fiscal rules. The UK’s borrowing costs are not outrageous by historic or international standards but have become more burdensome since 2020. We should not fetishise ‘the markets’, but influential bond market actors are calling for stronger fiscal ‘buffers’. Any government without a Truss-style death wish should pay attention.

However, this remains a deeply technocratic and backward-looking argument. It blames the situation on the previous Conservative government’s incompetence while claiming there is ‘no alternative’ if the aim is to pacify the markets.

 For the tax gamble to succeed, Labour Ministers should make more daring, forward-looking political arguments boldly and unashamedly. They can draw on the rich heritage of social democratic ideas about lifting people out of poverty, extending opportunity, and creating a better, fairer future. In doing so, they can revive the driving purpose of the great reforming Labour governments of the 20th century.

The first argument the Chancellor should draw on is that the wealthiest should pay the most. On the left, notably within the Green Party, the idea of a ‘wealth tax’ has gained traction. The problem with a simple wealth tax is that its prospects for raising revenue are uncertain and its recent track record elsewhere (notably in Spain) is unconvincing. In the UK, previous attempts at introducing wealth taxes in 1975 and 1924 also hit the political and technical buffers. But if the jury is still out on a generic ‘wealth tax’, there is a strong case for specific taxes on wealth and capital. In our appallingly unequal society, there is a compelling policy case for reforms that increase the taxation of capital and property, including capital gains equalisation, council tax revaluation or replacing council tax and stamp duty with more progressive, proportional property taxes. Politically, the government cannot rely on just taxing workers. It must tax wealth in some form.

Secondly, the government could explore ‘hypothecation’ – or earmarking increasing taxes for progressive purposes. That approach worked politically in the early 2000s when the Blair and Brown governments linked increased National Insurance to extra money for the NHS. A similar strategy could help convince taxpayers that additional contributions will be spent on their priorities. The Treasury will hate it, but their priorities are necessarily different from elected politicians.

Finally, the government must explain why ordinary people in the middle must, through income tax, pay more too. Taxes on wealth are essential politically, but they are insufficient for a resilient social-democratic politics and a truly better society. Taxation is the downpayment that we as citizens all make to live in a fair and cohesive society. As we know from strong welfare states elsewhere, adequate funding of public services needs a broad and sustainable tax base, which requires lower and middle income earners to contribute. We should all pay towards the collectively financed services from which we derive benefit.

Labour politicians should not be afraid to make the political arguments boldly and unashamedly. To meet our future needs as a nation in a world of hostile threats while maintaining public services straining under pressure, each of us needs to pay our share. If they are brave, Ministers can seize control of the conversation, facing down the fantasies of UK fiscal politics. At least no-one could then accuse this Government of being timid or incoherent anymore.

Patrick Diamond is Professor of Public Policy at Queen Mary University of London.

Colm Murphy is Senior Lecturer in British Politics at Queen Mary University of London, and a contributing editor of Renewal - a journal of social democracy.