Rachel Reeves's sums don't add up with unrealistic £5bn pledge from 'tax dodger' crackdown: Bill Carmichael

Labour revealed its plan for solving the UK’s economic problems this week and it involves simply taxing the rich a bit more.

According to Leeds West MP and Shadow Chancellor, Rachel Reeves, all we have to do is to clamp down on tax dodgers, close loopholes, and make wealthy “non-doms” pay more to the state, and there will be lots of money for extra NHS appointments and children’s breakfast clubs.

It is all so brilliantly simple it makes you wonder why no one has thought of it before! It seems all previous Chancellors, from Labour’s Gordon Brown, to the Conservative’s Jeremy Hunt, not to mention George Osborne, Alistair Darling, Kenneth Clarke, Nigel Lawson and Dennis Healey, were sitting on oodles of cash that could be used for public services, and didn’t realise it until Ms Reeves pointed it out.

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The Shadow Chancellor had to plug a gap in her spending commitments after the government adopted her plan to scrap non-dom status in the recent Budget in order to fund cuts to National Insurance. In political parlance Jeremy Hunt “shot her fox” and she had to come up with an alternative plan.

Shadow Chancellor Rachel Reeves has put forward plans to crackdown on tax avoidance  (Photo by Stefan Rousseau/PA Wire)Shadow Chancellor Rachel Reeves has put forward plans to crackdown on tax avoidance  (Photo by Stefan Rousseau/PA Wire)
Shadow Chancellor Rachel Reeves has put forward plans to crackdown on tax avoidance  (Photo by Stefan Rousseau/PA Wire)

So, she has decided to throw £555 million at HMRC to recruit more officers to tackle tax avoidance and evasion, which she says will raise £5 billion a year.

In addition she plans to tighten the rules on non-doms to bring in £1 billion a year, rising to £2.6bn over the course of the next Parliament.

The party points to the so-called “tax gap” - the difference between the theoretical amount of tax owed, and what the government actually collects in tax. According to the HMRC this stood at £35 billion in 2021/22.

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So, according to this plan, there is plenty of cash available for Labour’s spending pledges, including £365 million for school breakfast clubs, and £1.6 billion for more hospital appointments.

Simples! But at the risk of being a bit of an old cynic I can see some problems with this scheme.

First of all, if you are thinking why didn’t somebody think of this before, the answer is they have - numerous times. Most recently the 2010 Conservative-Lib Dem coalition government gave HMRC an extra £900 million to reduce the tax gap, with underwhelming results. The promised billions in extra tax for public services simply failed to materialise.

Second, it assumes that billionaires are going to meekly stay put and hand over the cash as Ms Reeves squeezes them until the pips squeak.

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But wealthy people are the most mobile population on earth with the means to upsticks and move to a more friendly tax jurisdiction if things get too rough in the UK. I hear Monaco and the Bahamas are very pleasant at any time of the year.

There is plenty of evidence internationally that when governments increase taxes on the wealthy, the wealthy take their money and run. As a result the government’s tax take could actually go down as a result of punitive tax policies on the rich.

But the biggest objection to Labour’s plan is that even if it works and brings in the promised extra cash, it is not going to make much of a difference. Of course the £5 billion Ms Reeves expects to raise is a substantial sum, but in terms of overall government spending it is no more than a drop in the ocean.

Let’s put it in perspective. Despite all the cries of “savage cuts” and “austerity”, public spending has not far off doubled since the Conservatives came to power - from around £672 billion in 2010 to £1,157 billion in 2023.

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The government - that is taxpayers - spend around £211 billion a year on health and social care, and £112 billion on debt interest. Given the scale of this spending, even if Labour’s plans are successful - and there is certainly no guarantee of that - £5 billion represents little more than a rounding error.

Ms Reeves is clearly a capable and intelligent woman, so surely she knows this. She must understand that given the state of the economy, if she sticks to her strict fiscal rules of not borrowing to fund day-to-day spending, the most likely result is either massive cuts to public spending or big tax increases, or, the most likely outcome, both.

By making unrealistic pledges like this week’s, she is setting Labour up for a cycle of over-promising followed by under-delivering. I predict bitter disillusionment with Labour will set in within 18 months of them winning the next general election.

Wouldn’t it be marvellous if politicians of any colour had the courage and integrity to treat us as adults, instead of children who can be distracted with promises of jam tomorrow.

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