Is it time for Rachel Reeves to give Britain a tax cut?

The self-employed have paid up. And investors are paying record amounts of capital gains tax. The public finance figures for January have been published, showing record tax receipts and handing the Chancellor, Rachel Reeves, a surprise £30 billion bonus. It is great news that the public finances are stabilising. Manchester mayor Andy Burnham may not be able to complain about being ‘in hock to the bond markets’ for much longer. And yet, surely this also shows that Britain is being overtaxed? Is it perhaps time to hand some of the money back? 

The UK’s public finances are suddenly in much better shape, with a record surplus recorded for January. The explanation for this is simple enough. Self-assessment tax returns brought in an extra £3.6 billion compared to a year earlier, while capital gains tax (CGT) yielded £17 billion, a massive £7 billion more than last year, and a cool £1.1 billion more than the Office for Budget Responsibility forecast. Reeves can stop complaining about the ‘black hole’ in the government’s books. She is rolling in cash. 

Her backbenchers are no doubt already planning ways for her to spend the extra money. She could allocate more to defence, cut the interest rate on student loans, award the junior doctors another big pay rise or give Ed Miliband another few billion to build some more windmills. After all, there is nothing the Labour party likes more than increasing public spending. 

There are two big problems, however. To start with, it is not going to last. The 40 per cent rise in CGT revenue makes it very clear that investors and entrepreneurs brought forward the sale of assets because they feared the rate would go up in last November’s Budget. You can only sell an asset once, and the same trick can’t be played again. It is likely that the amount collected will come down again next year. 

More seriously, the record receipts make it clear that Britain is now heavily overtaxed. The big increase in employer’s National Insurance, the extra business rates, frozen thresholds, and the extra that has to be paid by entrepreneurs have crushed the life out of the economy. We can see that very clearly in the rising rate of unemployment, now above 5 per cent, in the disappearance of graduate jobs, and in the growth rate, which last fell to just 0.1 per cent.

Reeves should use the surplus to hand some of the cash back to taxpayers. She has pushed taxes too high and damaged growth, confidence, and the incentive to work. A £10 billion round of tax cuts paid for out of today’s surplus would transform the UK’s prospects. Although, what’s the likelihood of this happening? Don’t hold your breath.