The Treasury should consider a wealth tax to close the growing gap in the public finances, according to a Labour former shadow chancellor.
Anneliese Dodds, who held the role under Keir Starmer in opposition, said ministers must have a “full and frank discussion” with the public about the “really big decisions” they had to take at this autumn’s budget.
With Rachel Reeves aiming to fill a financial hole that economists say could exceed £20bn, the senior Labour MP said there was “no silver bullet” to funding big-ticket items such as defence but the chancellor should consider tax rises.
Dodds quit her post as international development minister in February over a decision to slash the aid budget to pay for increased defence spending – a move she said was a mistake that would have a big impact on global security.
With Russia and China already stepping into the gap to boost their own global influence, she said now was not the time for the UK to be “walking back” from using soft power.
In her first interview since standing down, Dodds told the Guardian: “It’s important that we have a longer-term approach. That does mean asking and confronting difficult questions around our fiscal position, around taxation. But if we’re open and honest about the nature of the challenge that we face, we cannot duck that.
“Now is a time when we’re seeing forces outside our country’s control impacting on our security. It’s important to have an open conversation with the public and say that means we will need to change when it comes to tax. That needs to be done in a way where those with the broadest shoulders take more responsibility.”
While she did not set out exactly where wealth taxes might fall, Dodds urged the Treasury to “look carefully” at the work of economist Arun Advani, whose wealth tax commission in 2020 recommended a one-off levy on millionaire households as a better way of raising revenue than increasing taxes on workers or consumers.
Dodds also suggested that Rachel Reeves should look again at her fiscal rules. Photograph: Sean Smith/The Guardian
She joins a growing chorus of Labour MPs, not all from the left of the party, calling for further wealth taxes this autumn. However, proposals for an annual 2% tax on assets over £10m have been denounced as “daft” by the business secretary, Jonathan Reynolds. Government insiders have questioned whether it would raise any funds.
Dodds acknowledged there would be consequences from any new wealth tax and said she did not underestimate the challenges involved. However, she played down suggestions the policy would automatically lead to a reduction in the tax base as people moved assets overseas.
She added: “There’s no silver bullet here, and I’ve been quite cautious about claims in the past that there’s one single change to tax that could suddenly, immediately inject enormous amounts of money into the government coffers without any further implications. That’s simply not the case. There will be consequences.”
Dodds also suggested that Reeves should look again at her fiscal rules to help deliver an increase in defence spending, rather than through further cuts to aid. The government has pledged to spend 2.5% of GDP on defence from 2027, with an ambition to reach 3% in the next parliament. It has not said how this would be paid for.
She said it would be very difficult for the UK to change its fiscal rules to borrow more to invest in defence, as Germany – which was in a stronger economic position – did when it loosened its “debt brake” in March. But she added: “There’s no route forward without some risk and without some cost.”
Forecasts twice a year from the Office for Budget Responsibility have ended up driving fiscal policy, injecting more uncertainty into the system, she said. The IMF has suggested the government should consider having the public finances formally assessed only once a year instead.
Dodds said she had little doubt the government would have to further increase defence spending. But she said this could not come from further cuts to the aid budget without an impact on global security and migration patterns.
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“I believe the public know that also,” she said. “We need to have a really full and frank discussion now nationally about how we will deliver that more secure country, but also about the challenges of doing that at the same time as getting our public services up off their knees.
“We did see a reduction in our soft power, and we saw a reduction in what makes our country stronger. Especially now with the rise of China, Russia, becoming far more involved in the continent of Africa, and many other geopolitical pressures, now isn’t the time to be walking back from those commitments.
“We will also see the impact on global security. We also see the impact of it in population movements. It’s no surprise that the number of people seeking asylum in the UK from Sudan, for example, has increased. There is eventually that knock-on impact. There’s no question about that.”
Dodds said there was “no magic wand” to bring down the number of asylum hotels, which have been funded from the aid budget. Suggestions that the government could make big savings from quick closures were “just not credible”.
She did not criticise Starmer directly for his “island of strangers” remarks, which the prime minister has since said he regretted, and said it was “right to acknowledge people’s concerns” about small boat crossings but she urged ministers “to be clear that we are talking ultimately about human beings”.
As a former Labour chair, Dodds suggested the party had to do more to explain what it stood for to take on the rise of Nigel Farage’s Reform UK.
She said: “What I find time and again when I speak with people who are considering Reform is that they want politicians to say what they think. They want politicians who are upfront about what they believe and who act on their beliefs.”
She described Jeremy Corbyn’s new movement as “a bit like the People’s Front of Judea” from Monty Python’s Life of Brian but warned that it could end up splitting the vote: “We have seen in some other countries, a splintering of the left, and centre-left parties doing very badly.”