King's Speech Debate 12 August 2024

Following the King’s Speech on 17 July, MPs debated the government’s programme for five days in the House of Commons. Some of the key issues discussed included economic growth, the Budget Responsibility Bill, VAT on private schools and devolution.

At the end of days four and five of the debate MPs voted on amendments to the motion to welcome the King’s Speech. Given the government’s large majority it is unsurprising that none was successful.

The Conservative amendment focused on economic policy, speaking of the “improved economic conditions the Government is inheriting” and “regretting that there is no mention of how to make necessary savings on welfare; urging the Government to meet the commitment set out in the Labour Party’s manifesto not to raise taxes on working people; regretting that the Speech fails to make a commitment not to use changes to reliefs to raise taxes; and calling on the Government to increase income tax thresholds to prevent income tax from being charged on the State Pension.

This was unsurprisingly rejected by 111 votes to 390. 

Rachel Reeves, the Chancellor of the Exchequer, argued that the last Parliament had the highest tax burden in 70 years and said that the Conservatives ‘crashed’ the economy.  She said she had warned “that whoever won the general election would inherit the worst set of circumstances since the Second World War”. Reeves added that the government’s No. 1 mission is to “secure sustained economic growth” and that they would “keep taxes, inflation and mortgages as low as possible”.

In an intervention, Lib Dem Andrew George challenged the Chancellor to take action on the misuse of public funds, citing alleged corruption in Covid aid distribution and tax loopholes. Reeves replied: “We need to get value for money for all tax incentives. I will ensure that the Treasury and the Ministry of Housing, Communities and Local Government look at the changes that he suggests.”

The Chancellor said that the Pension Schemes Bill will boost pension pots by over £11,000 through a new and improved value for money framework. Additionally, to ensure that the Bill is as strong as possible, the government is launching a pensions investment review. The Secretary of State for Work and Pensions, Liz Kendall, said these measures could “help improve incomes in retirement” and unlock investment in British businesses and improve outcomes for British pensioners.

In addition John McDonnell ( Shadow Chancellor until 2019) urged his party to be ‘honest’ about taxation and the distribution of wealth and said: “we need to grasp the nettle of levelling capital gains tax with income tax, making sure that our tax reliefs and the corporate welfare that is going on is effective and not simply subsidising profits”.

Other comments touched upon devolution and financial challenges that local authorities face and made a case for reforming the council tax system.

Conservative leader Rishi Sunak challenged the government’s claims that they had a poor economic inheritance: “With inflation at 2%, unemployment at 4% and the fastest growing economy in the G7 so far this year, the Labour Party has inherited an economy that is already on an upward trajectory.”

On strengthening the role of the Office for Budget Responsibility (OBR), he observed that “the work of the OBR already means that Labour Members had the full details of the public finances when they set out their manifesto… that has also taken away from Oppositions coming into government the ability to say that they did not know the true state of the public finances”. This means, he suggested, that were Labour to breach their promises of no tax rises on working people and no plans for tax rises beyond what is in their manifesto, “it would be difficult for them to claim that [this was justified because] things are worse than they thought”.

Jeremy Hunt, now the Shadow Chancellor, also challenged the government’s claim that they have inherited the “worst economy” since the Second World War. He suggested that this ‘nonsense’ claim is “a pretext for long-planned tax rises”. Hunt quoted the Institute for Fiscal Studies Director Paul Johnson who had said that, thanks to the OBR, the nation’s books are “wide open” and “fully transparent”, so pretending things are worse than expected “really won’t wash.”

The Shadow Chancellor urged the government not to raise taxes on working people. He praised the Conservative government’s record on tax, including full expensing. He suggested that if Labour increases business taxation, they will risk the UK’s attractiveness to foreign investors. While “keeping taxes down is hard work”, lower taxes, when funded properly, can boost growth, he maintained.

On the Budget Responsibility Bill, Hunt said: “We all understand the politics of a Bill that allows the government to make endless references to the mini Budget, but if the right hon. Lady is really committed to fiscal responsibility alongside growth, I hope that she will today confirm that she will not fiddle with the five-year debt rule to allow increased debt through the back door”.

An intervention from a Labour MP accused Hunt of having backtracked on tax cut promises made at the election. The Shadow Chancellor said this was not the case: “We offered… fully funded tax cuts… to be brought in over time over the next Parliament… not immediately”.

Mel Stride, Shadow Secretary of State for Work and Pensions, accused the Chancellor of “rolling the pitch to raise taxes. Against all the commitments she made during the general election, she will be raising those taxes in the autumn,” he predicted.

Saqib Bhatti enquired about the government’s attack on their economic inheritance, asking: “If the Chancellor didn't use the OBR forecasts”, what did she use to make those “fully funded” promises?

Dame Harriett Baldwin, former Chair of the Treasury Committee, suggested some of the government's measures mirror things called for by the International Monetary Fund (IMF). She said the IMF also wanted to see tax increases. She told the House that during her committee’s private session with the IMF, they proposed setting capital gains tax rates in line with income tax rates, subjecting the sale of primary residences to capital gains tax, ending inheritance tax loopholes for pensions, family businesses and farms, revaluing all of England’s homes for council tax and introducing road pricing. Baldwin hoped that the government would rule out these proposals, saying: “the tax rises that the government admit to already—the pensioner tax, the tax on education, and regulatory costs galore — are bad enough”.

David Simmonds, Dr Ben Spencer and Alicia Kearns expressed their disagreement with the government's intention to charge VAT on independent school fees. Kearns highlighted that in her constituency there are over 1,000 children with special educational needs who attend these schools and asked: “Why are the government punishing parents who want the best for their children”. A newly elected MP, Bradley Thomas, called the government’s proposal “an ill-conceived affront” to the children and families who currently exercise choice in education provision.

Observation

It seems as if the debate over the £20 billion black hole in the Government’s finances will run and run. As above both the former Prime Minister and Chancellor reiterated that the OBR’s role meant that there was clarity on the Government’s finances. However, Paul Johnson of the IFS did cast doubt on both party’s tax assumptions in the run up to the General Election so perhaps the truth lies somewhere in the middle.

The comments by Harriet Baldwin regarding the IMF proposals are interesting and possibly disturbing to many taxpayers. There seems to be little doubt that CGT will be raised although whether the rates are aligned with those for Income Tax is by no means certain. The Chancellor has refused to rule out changes to CGT. There is “A Call for evidence on the Tax Treatment of Carried Interest “with responses required by 30 August. It is possible that whatever is decided here may influence the decision on the CGT rates for other assets. Otherwise, there would be an array of different CGT rates.

There is particular concern for buy to let landlords who if the CGT rate was aligned with Income Tax could leave the average landlord £11,000 worse off, according to analysis. This would of course just add to the other negative issues these landlords are faced with. The possibility of an increase in capital gains tax could also lead to an increase in the number of UK-domiciled clients leaving.

We are likely to know more about this on 30 October and it will be interesting to see if any change is implemented immediately or from the start of the new tax year. There is a precedent of rates changing mid tax year but the advantage of announcing a future date is it avoids criticism of the absence of advance knowledge and may encourage asset sales prior to 6 April 2025 leading to increased revenue for the Exchequer. Maybe rumours nearer the time will be instructive.