A four-letter word could win Labour the next general election

The unseemly Tory bidding war on tax cuts is influencing Labour’s thinking on tax

When the government stole Labour’s flagship policy of a windfall tax on oil and gas companies, the Labour leadership discussed rushing out a policy announcement to keep ahead of the game. Instead, Keir Starmer and Rachel Reeves, the shadow chancellor, agreed to unveil their next moves in their own time, a sign of confidence on the economy, on which Labour has usually trailed the Conservatives in the opinion polls since losing power in 2010.

That confidence has risen during the Tory leadership contest. The blue-on-blue attacks in which senior Tories have trashed their party’s record in government have already handed Labour a general election treasure chest. And the unseemly Tory bidding war on tax cuts is influencing Labour’s thinking on tax. I’m told Labour is likely to fight the election on a promise of “fair taxes”. That would mean ditching Jeremy Corbyn’s proposal to raise income tax for the top 5 per cent of earners (those above £80,000), which was also one of Starmer’s 10 pledges when he ran for the leadership.

Although a final decision will be taken closer to the next election, one senior Labour figure told me: “The direction of travel is towards ‘fair tax’ rather than a package of tax increases.” The move will anger the Labour left, which thinks there will be no votes in it since the rich will still mainly vote Tory and it will reduce Labour’s ability to rescue public services.

However, the Tory contest has given Labour another reason to go down the “fair” route. Liz Truss’s plan to reverse the rise in national insurance contributions, which took effect in April, would hand only 15 per cent of the savings to the poorer half of the population, while 28 per cent would go to the top twentieth, according to the Resolution Foundation.

Rishi Sunak has already pencilled in a 1p-in-the-pound reduction in the 20p rate of income tax in 2024. Yet almost half of the total benefit (some £2.5bn) would go to the fifth of households with the highest incomes, with just 2.6 per cent (£137m) going to the poorest, according to the IPPR think tank.

Today Sunak has promised to temporarily remove VAT from domestic fuel bills. Yet, as Team Truss was quick to point out, a former chancellor who, in a remarkable coincidence, also happened to be called Rishi Sunak, rejected this idea in February because it would “disproportionately benefit wealthier households”.

There is a growing confidence inside Labour that it can win a debate on the dividing line of “unfair versus fair tax”. Labour would prioritise public services and warn that the Tories would bring a return to austerity. Labour might pledge to reduce taxes for some people at the bottom end of the scale, financed by higher “fair” taxes on income from shares, dividends and property, from which capital gains would be taxed like income. Labour’s model is its proposed clampdown on private equity executives, part of whose earnings are taxed as capital gains at a lower rate than income. This principle would be extended to other groups.

“Fair tax” might be simple, but sometimes the best things in politics are. “Fair” is a better four-letter word than the one Boris Johnson used to tell business to get lost when they raised concerns about Brexit. The other F-word is certainly in vogue for Labour. In a speech on Monday, Starmer used “fair” or “fairly” 13 times, promising “strong, secure and fair growth” – although, as ever, more detail will be needed.

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Labour’s four-letter word might just help it win power. A “fair tax” pledge would be a good antidote to the Tories’ obsessive promises of “tax cuts”, which grabs headlines but is very misleading; the tax burden would increase under a Truss or Sunak premiership due to increases already announced by the Johnson government. Although less visible than the 20p basic rate, the four-year freeze in tax allowances could bring £21bn into Treasury coffers.

It’s one reason why taxes are on course to rise to their highest level for 70 years. (Thankfully, Truss keeps reminding us of that so hopefully plenty of voters will remember.)

The Tory arms race might unintentionally enhance Labour’s credibility. Reeves’s fiscal rules – balancing the books on day-to-day spending, with borrowing allowed only for investment and reducing debt – are tougher than Truss’s approach and similar to Sunak’s, addressing Labour’s traditional weakness of not being trusted on the economy.

If Truss, the favourite, wins her race with Sunak, the Tories would risk losing their unique selling point of fiscal responsibility, something Tory members would be wise to contemplate as they weigh up the two candidates. The real winner then? Labour.