Buckley says Reeves needs to send financial markets a signal that shows she is serious about the public finances if she is to avoid a repeat of the investor revolt following Liz Truss’s mini-Budget. That means tax rises are on the way.
“With Labour having promised to avoid higher income tax, VAT, NICs and corporation tax – representing about three quarters of the annual tax take – CGT and IHT are the most obvious choices left to raise taxes.”
There is also speculation around whether a Labour government wants to encourage more retail investors to hold British debt.
At the moment there is a tax incentive to hold gilts because while individuals are subject to income tax on the interest earned on them, they are exempt from capital gains tax (CGT) when the bonds are sold or mature.
Raja says Reeves must resist any temptation to change this.
“If Labour changes the tax treatment of gilts at the Budget, it could reduce investors’ appetite to own gilts, given increased tax costs. At present, any capital gains from gilts are tax-free. This is something we will be watching very closely.”
Meanwhile, UK debt continues to rise. It is already at 100pc of GDP and could well climb above it in the coming months if public spending keeps climbing.
A recent report by the Lords’ economic affairs committee warned that Reeves must raise taxes or cut back public services to guard against a potential debt crisis.
There is mounting speculation that Reeves will change the current debt rule, which requires debt only to be falling between the fourth and fifth years of the OBR’s forecast, to give her more space to ramp up spending.
Lord Bridges, the chairman of the committee, believes this would be a mistake. “The Chancellor must overhaul the current debt rule – under which debt can be higher in the forecast’s fifth year than in the first,” he says.
“It’s easy to game, and so it does not ensure a falling debt ratio.
“We need instead a rule that has teeth, so ministers are held accountable for putting debt back onto a gradual downward path.”
In the meantime, the debt simply keeps rising.