Labour just can't resist another tax, but why don't they realise that's what's stopping growth?

12 February 2025, 06:30 | Updated: 14 February 2025, 16:12

Keir Starmer has been at pains to say that Labour’s number one mission is economic growth. But while policy announcements are welcome, they are just that - announcements.

It is the actions his government has taken that count. And so far Labour have done nothing to restrain the increasing weight of the tax system on the UK’s most productive businesses and workers - quite the opposite, in fact.

The burden of tax didn’t start with this Labour government - the Conservatives left the overall tax burden the highest in over 70 years.

But even if Labour isn’t totally to blame - they haven’t helped. Rachel Reeve’s first budget massively increased the costs of employing workers - due to changes to National Insurance and the minimum wage, a full time minimum wage worker will cost an extra £2,367 this year compared to last year.

These changes have led to businesses saying they will hire fewer people.

What Labour could do to help the tax system support growth is comprehensively reform the tax code, which is overly complicated and distorts productive activity.

The National Audit Office estimates that it costs £15.4 billion for businesses to comply with the tax system every year. Making it easier to comply saves time and frees up businesses to be innovative and productive.

But we also need to look at what we are taxing. Almost every tax reduces the supply of the thing it is taxing – a tax on labour reduces work, a tax on business reduces investment, and a tax on property transactions reduces the number of houses being sold (and hence built).

However, some taxes are far more damaging than others. Taxes on corporate income and labour, for example, are far more damaging than a tax on consumption, like VAT.

By shifting the burden of taxation from income to consumption, we would see real economic gains without having to cut government spending.

Every pound the government takes in tax is a pound that cannot be spent by businesses or households on the things that make this country more productive.

But the only way to address this is to reduce the size of the state - either by making it more productive, or having it do less.

The NHS for example is 20% less productive than pre-pandemic – fixing this could save the government an enormous amount in the long term. In terms of doing less, Labour has made a start on trying to reduce the welfare bill.

Both options require hard graft and difficult political choices, and neither will be enough on their own.

Unfortunately for Rachel Reeves, every decision she makes will have a fiscal and a political cost. She needs to be brave and make decisions for the long term – cutting government spending, reducing the tax burden and reforming the tax system are necessary for growth.

New taxes, the likes of which her colleagues are likely to call for, will do the exact opposite.

• Daniel Herring, Tax and Fiscal Researcher at the Centre for Policy Studies.

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