Here’s how Rachel Reeves’ Spring Statement must offer hope

‘The government needs to recalibrate policies’

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

On 26 March 2025, the UK Chancellor Rachel Reeves will present her Spring Statement on the economy to Parliament. The Chancellor will provide a snapshot of the fiscal health, challenges and clues to strategic changes.

The government wants economic growth, higher investment, lower public debt, rejuvenated public services and higher spending on defence. None of this can be achieved without improvement of the economic condition of the bottom 50% of the population. Yet the government is planning billions of pounds of cuts to benefits and other public spending. This means real cuts in wages, benefits for the poor, old, sick and disabled as well as spending cuts in education, transport and green economy, none of which can deliver economic growth or social stability.

The government needs to recalibrate policies but is boxed-in by its pre-election promises of not increasing employee National Insurance; income tax rates, VAT and corporation tax. Labour politicians also said that they had no plans to change inheritance tax and capital gains tax rates though that does not rule out changes to exemptions, reliefs and thresholds.  It is not keen on wealth taxes either.

There can be no economic growth without investment and the UK has been lagging its international competitors. The UK has been bottom of the G7 league for investment in 24 out of last 30 years. It ranks a lowly 28th for business investment out of 31 OECD countries. This position cannot be changed without direct investment by the state in infrastructure and new industries, especially as the private sector has shown little appetite for long-term investment. The water industry is a good example of this neglect.

The government can create new money to fund public investment, but neoliberals balk at such suggestions. The government can borrow more. The UK public debt is around £2.8 trillion, close to 100% of GDP. In comparison, the post-war construction of the UK was facilitated by government debt of 270% of GDP. This built the welfare state, infrastructure, new industries, revived the private sector, boosted employment and generated tax revenues. By 1976, the debt was reduced to 49% of GDP, and declined to around 22% of GDP in 1990. An entrepreneurial state is necessary again.

The public debt includes nearly £700bn of quantitative easing  (QE) or the amounts owed by the Treasury to the Bank of England, which is not really debt. The exclusion of QE reduces the public debt to 75% of GDP and increases possibilities of public investment. Borrowing by the government is always cheaper than borrowing by the private sector. So, it does not need another round of private finance initiate (PFI) under which for each £1 of private sector investment in public infrastructure the government repays around £6.

A government looking for spending cuts must look at corporate welfare. Vast amounts of subsidies are handed to auto, steel, oil, gas, coal, biomass, shipping and other companies to boost their profits and enrich shareholders. Energy companies have been bailed out, and banks continue to receive public money. For example, since 2009 after flooding the banks with £895bn of QE the Bank of England has been paying interest on all reserves that commercial banks hold with it. These reserves enable banks to transact, settle interbank transactions and provide financial stability, but the cost is borne by the public purse. Since 2021, government has paid £70bn in interest and is due to pay another £120bn by 2028. This policy needs to be axed and will provide billions for government spending.

Successive governments have eroded the purchasing power of low/middle income families. Some 16m Britons, including 5.2m children, live in poverty. Yet, the Labour government’s first act was to continue with the Tory two-child benefit cap, followed by removal of winter fuel payment from thousands of pensioners below the poverty line. This has been accompanied by continuation of the Tory freeze on income tax thresholds until 2028. People with modest annual incomes of £12,571 are liable to pay income tax and national insurance. In 2009-10, 30.6m individuals paid income tax compared to 37.4m in 2024-25. For the same period, the number of pensioners paying income tax has increased from 5.69m to 8.5m.

The regressive tax system has disabled low/middle income families. The richest fifth pay 31% of gross household income in direct taxes; compared to 14% for the poorest fifth. The richest fifth pay 9% of disposable income in indirect taxes; compared to 28% for the poorest fifth. Altogether, the poorest pay higher proportion of income in tax and it is damaging the economy.

The net result of the assaults is that the bottom 50% of the population has 5% of wealth, and the top 10% a staggering 57%.The bottom fifth has only 0.5% of wealth. The median annual pre-tax wage is £29,604. The real average wage is unchanged since 2008 and work does not pay enough. Nearly 40% of Universal Credit claimants are in work. Millions rely upon charity and food banks for survival and do not have the capacity to boost economic revival.

The government must boost the purchasing power of low/middle income families by  embracing progressive taxation, ending corporate profiteering, strengthening trade union and worker rights, require worker-elected directors on the boards of large companies and enable workers to vote on executive pay to ensure that wealth is equitably shared.

The government must require the rich to contribute more to economic revival. Just 1% of the population has wealth of £2.8 trillion, compared to £2.4 trillion held by 70% of the population combined. The richest four Britons have more wealth than 20m people combined. The rich fund political parties and legislators, use lobbyists and media to get their way. In its election manifesto, Labour promised to reform taxation of non-doms and private equity managers. Yet under pressure, the government is rowing back.

At the very least, the government must abolish VAT on domestic fuel, cut the standard rate of VAT, increase tax free personal allowance by £1,000, and maintain real value of benefits. The cost of this and additional social investment needs to be borne by the wealthy. By eliminating tax perks of the rich the government can raise billions to reduce inequalities and energise the economy. Here are a few examples.

Capital gains are taxed in at rates of 10%-28%; dividends are taxed at rates of 8.75% to 39.35%, compared to wages and salaries at rates between 20% and 45%. Recipients of capital gains and dividends don’t pay national insurance either as governments have chosen to tax return on wealth at lower rates than return on investment of human capital. By aligning taxation of dividends and capital gains with wages, the government can raise over £20bn.

In 2023, government handed out £70.6bn tax relief on pension contributions. Some 63% of it went to 6m individuals paying income tax at the marginal rate of 40% and 45%. The remaining 37% went to 28.1m basic rate (20% rate) taxpayers. By restricting tax relief at the rate 20% to all, the government will have £14.5bn spare. It can restrict the relief to 24% and will still have billions left over.

Employees pay national insurance at the rate of 8% on annual incomes between £12,570 and £50,270. Beyond that the rate is 2%. This means that the rich pay a lower proportion of their income in national insurance. The government has a number of options; it can extend 8% to all incomes or have a graduated approach. For example, it can levy additional 2% on incomes between £50,271 and £100,000; and say 3% on income between £100,001 and £150,000, and a higher rate on incomes above that. A progressive reform of national insurance can generate large sums.

Some high earner escape national insurance charges altogether. For example, accountants, lawyers, architects, surveyors and many others operate as limited liability partnerships (LLPs). This enables them to dodge national insurance contributions. Members of LLPs are treated as self-employed for national insurance purposes and pay the lower Class 4 rate. This perk saves the partners around £138,000 for every £1m of profit shared. Partners of just four big law firms alone benefit by around £4bn a year. By ending this dodge the government can collect billions.

Successive governments have done little to curb tax abuse by corporations and wealthy elites. HMRC admits that it has failed to collect over £500bn in taxes since 2010. Other economic models estimate it to be closer to around £1,400bn. This does not include taxes lost due to profit shifting by large corporations or money stashed in tax havens by the rich. There have been no prosecutions of corporations for the tax evasion offences under the Criminal Finances Act 2017. The government must enforce laws. Additional amounts can be raised through wealth taxes and a financial transactions tax.

The Chancellor’s Spring Statement must offer hope and policies that end years of austerity. It must prioritise the economic wellbeing of the bottom 50% of the population through equitable distribution of income and wealth.