Rachel Reeves under Labour pressure to raise capital gains tax to revive public services

Rachel Reeves is under pressure from Labour shadow ministers to raise capital gains tax as part of an autumn budget at which the shadow chancellor is considering up to a dozen new revenue-raising measures.

Members of the shadow cabinet want Reeves to increase rates of capital gains tax (CGT) as a way to raise billions more to pay for public services, as the shadow chancellor has already ruled out raising income tax, national insurance and VAT.

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Labour is planning a major package of measures this autumn, according to party sources, and Reeves is looking for a “doctor’s mandate”: the state of the public finances is so bad, she will argue, that they will need major surgery to correct.

One source said: “Rachel has between 10 and 12 measures she is looking at which she hasn’t yet announced, all of which will raise small pots of money, with the ambition they should add up to something all together.”

Another said the shadow chancellor wanted to take a “kitchen sink” approach in order to raise tax income and pursue radical reform and investment in public services. The person admitted: “That is not what they are presenting the public with right now.”

“Kitchen-sinking” is a tool common in political and business circles – it has been used at companies including Tesco to Nokia – in which a new leader releases all the bad news at once, thereby justifying drastic measures.

A Labour spokesperson said: “We have fully costed, fully funded plans, and have set out the specific tax loopholes we would close to bring in an immediate injection of cash into our public services. Nothing in our plans requires any additional tax to be increased and there will be no return to austerity if Labour are elected on 4 July.”

The plans come amid an increasingly bitter row over Conservative claims that Labour plans to increase taxes if it wins the election. On Wednesday, the Tories pledged not to hike property taxes, issuing a so-called “family home tax guarantee”, and called on Labour to match it. The chancellor, Jeremy Hunt, said a Tory government would not raise the number of council tax bands, stamp duty or CGT.

Rishi Sunak, the prime minister, on Tuesday accused the Labour leader, Keir Starmer, of planning £2,000-worth of tax rises for each household over the next parliament. Labour has dismissed that claim as a lie, but has not completely ruled out raising some taxes beyond what has already been announced if the economic situation is worse than expected.

Those close to Reeves say no final decisions have been made about what will be in an autumn budget beyond what has already been announced and ruled out.

The party has promised to increase the windfall tax on oil and gas companies, remove tax exemptions from private schools, and tighten the taxation of non-doms. But Reeves has ruled out increasing almost all the main taxes, despite projections showing that public services will have to be cut heavily in the next parliament unless whoever wins the election finds new sources of money.

Labour officials will meet trade union bosses on Friday to agree the party’s manifesto, which will be formally launched next week. People close to the process say the document is likely to be “slim” and contain little that has not already been announced, and some in Labour are hoping it will leave Reeves enough room for more meaningful fiscal measures if she becomes chancellor.

A report from the Resolution Foundation thinktank on Tuesday warned that, on current forecasts, the next government will have to make £19bn of annual cuts to unprotected departments by 2028-29. That is likely to mean steep reductions in the budgets for courts, local government and the Home Office.

The report finds that things could get worse, with even mild downgrades to current estimates for productivity and interest rates adding billions to the amount the next government has to find.

One former Treasury official said: “In the end, not least for demographic reasons, this country is going to have to pay more tax and Labour is going to have to find ways to raise it. The British people are crying out for an honest conversation about this.”

Some in Labour agree that a failure to admit they will have to raise taxes could become a “credibility issue” with the public, business leaders and international investors.

Sources close to Reeves say she is now looking at a number of ways to raise cash that she has not already ruled out as part of a fiscal statement in the autumn.

The shadow chancellor is being lobbied heavily to increase CGT. Under the current system, profits from the sale of second homes or shares in businesses are taxed at a much lower rate than wages.

Some in the shadow cabinet want the tax to be raised in line with income, which would mean a jump from a higher rate of 24% to 40% or even 45%, raising an estimated £8bn.

As a Conservative chancellor, Nigel Lawson increased the capital gains rate to match income taxes in 1988, but Labour cut it again in subsequent budgets.

The less drastic option in the near term is for Labour to reverse Hunt’s decision at this year’s budget to cut the higher rate of CGT on second homes, raising it from 24% back up to 28%.

However, such a move would be unlikely to raise much, if any, money given that the Office for Budget Responsibility calculated in March that the CGT move would actually generate a very small amount of extra money for the Treasury – £5m in 2028-29.

Some in the party are advocating the return of the health and social care levy – a 1.25 percentage point rise in national insurance that was announced by Boris Johnson as prime minister but then scrapped by Kwasi Kwarteng in 2022.

Unlike national insurance, the levy would have applied to pensioners and would have been partly earmarked to pay for improvements to the health service.

The idea has received the backing of Sir Nicholas Macpherson, the former head civil servant at the Treasury. He wrote in the Financial Times recently: “The new chancellor will at least have several months to come up with a creative solution to this tax conundrum. I would advise them to look again at the health and social care levy.”

Labour insiders, however, said Reeves is unlikely to bring back the levy, judging that it would count as a breach of her promise not to raise national insurance.

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