Ditching a damaging capital gains tax rise doesn’t make Healey a pro-growth Chancellor

Although the government has ruled out raising Capital Gains Tax (CGT) in its upcoming budget, Labour's overall tax and spending policies are still seen as economically damaging and uncompetitive, argues Daniel Herring. With the government needing to find funds for the budget, it has had no choice but to implement smaller tax increases.

Raising CGT, even by aligning it with income tax, was considered a way to raise revenue while avoiding hurting working people. However, CGT is an economically damaging tax that can be counterproductive. Only 32,000 taxpayers generate 80% of CGT revenue, and 5,000 account for half. Furthermore, individuals choose when to sell their assets, and if they delay their sale, it could result in less productive use of the asset.

The HMRC estimates that raising the higher rate of CGT by 10 points could lower revenue by £3.6bn after three years, and that raising it to 45% would make the UK's rate the highest in the world, pushing the UK to 32nd in terms of tax competitiveness. Raising CGT could also make the UK less competitive. The only argument in favor of aligning CGT with income tax is for inflation protection, but this should only be for an upper limit, not a rate increase.

Labour leader John Healey is caught between markets and backbenchers, with backbenchers wanting increased spending and business wanting spending constraints and pro-growth reforms. Healey has listened to Jim O'Neill's warning that raising CGT would send the wrong message to business. However, this decision does not make Healey a pro-growth Chancellor.

If growth were the government's top priority, Healey would focus on reducing taxes on businesses by cutting spending. Other damaging taxes Healey plans to introduce, such as a tax on banks, are likely to raise little revenue but increase the cost of capital. These taxes come on top of the already damaging tax increases made by Rachel Reeves, including an increase in employer national insurance.

Additionally, Healey's approach shows a fundamental misunderstanding within Labour, as all countries with higher spending governments rely on higher taxes on ordinary workers to fund them. Labour must choose between being a high-spending state with high taxes on ordinary workers or a low-spending state with low taxes on ordinary people.

They cannot fund a high-spending state while only taxing the rich, as there aren't enough of them and they will leave. Daniel Herring is the head of economic and fiscal policy at the Centre for Policy Studies.