Revealed: how much 13 years of New Labour cost you

Sir Tony Blair’s 1997 landslide victory marked the start of 13 years of New Labour rule. But who emerged richer – and who was made poorer?

During Sir Keir Starmer’s general election campaign, Labour’s manifesto was light on detail, especially when it came to tax and spending.

The party promised not to increase “the big three” – income tax, National Insurance (NI) or VAT. But this still left plenty of room for manoeuvre.

The lack of transparency has fuelled fears that the party could introduce a slew of tax grabs, including on capital gains, inheritance and pension savings.

So, in an information vacuum, looking back at the winners and losers from the last time Labour was in power may offer clues about what’s coming down the track.

Tax by stealth

Labour’s 1997 manifesto promised that there would be no increase in the basic or top rates of income tax.

New Labour did not invent “stealth taxes”, but the term was coined to capture the strategies the party pursued to raise revenue while still honouring its manifesto commitment.

One of the subtlest forms of stealth tax exploits fiscal drag, where wages rise more quickly than tax thresholds.

The basic rate of income tax was cut gradually from 23pc to 20pc over the New Labour years, yet thresholds did not consistently rise in line with inflation.

Figures from the IFS show the share of the population paying income tax rose from 56.6pc when Labour came to power to a peak of 65.5pc in 2007-08, before dropping back slightly as the 2008 financial crisis ravaged workers’ earnings and pushed up inflation.

But the rise in the numbers paying the higher rate of tax – currently set at 40pc – was even more stark.

Initially conceived as a tax on high earners, in 1990-91 the higher rate was paid by 1.7 million people, or 3.7pc of the population.

By the eve of the financial crisis, that was up to almost 8pc.

A heavier tax burden came in the form of the additional rate of tax, a 50p levy on those earning more than £150,000 – introduced by Gordon Brown’s chancellor, Alistair Darling, just before the coalition government took over in 2010.

In 2002, Brown hiked National Insurance (NI) by 1pc to help finance a £6.1bn increase in health spending.

The IFS concluded that between 1997 and 2010, New Labour’s changes to income tax and NI amounted to a tax rise of £6.2bn a year – or £600 per household – only part of which was the result of active policy changes. The rest was due to thresholds not increasing as quickly as incomes.

One threshold that did rise was the nil-rate band for inheritance tax – the amount below which no tax is due. This increased from £200,000 to £325,000 over New Labour’s tenure – a 27pc rise after adjusting for inflation.

The Tories have built on Brown’s stealth tax legacy. Income tax thresholds have remained frozen since 2020-21 and are set to remain so until 2027-28, dragging millions more taxpayers into higher brackets.

The 45p additional rate income tax threshold was 6.2 times average earnings when the Conservatives came to power in 2010.

Today, workers only have to earn 3.6 times average earnings to be taxed the highest rate – in part due to the threshold being cut from £150,000 to £125,140 in April 2023.

Some 18pc of income taxpayers were paying either the higher or additional rate in 2023-24, according to Office for Budget Responsibility (OBR) figures, up from 10.4pc when the Conservatives came to power.

Brown, when chancellor, also introduced reforms to capital gains tax, primarily “taper relief”, which lowered the tax rate for investments held for longer periods of time.

This was abolished in 2008 when Alistair Darling also cut capital gains tax to a single flat rate for the first time since 1988.

The new rate was set at 18pc, below the income tax rates for lower and higher earners of 20pc and 40pc.

The strongest criticism of the move came from the left of the party. It was pointed out that employers paying themselves in shares were being taxed at a lower rate than their cleaners.

Despite the taper, HMRC data shows that capital gains tax receipts tripled from £2.5bn in 1997-98 to £7.85bn in 2007-2008, before collapsing back to £2.49bn in the wake of the financial crisis.

The resulting recession forced the Brown government to step in with bank bailouts and fiscal stimulus measures. This helped to double Britain’s national debt from around 33pc of GDP before the crisis to 65.3pc by the time Labour left office.

Spreading wealth

New Labour can claim to have been one of the most redistributive governments of the past 80 years.

IFS data shows that the party’s tax and benefit changes led to the poorest tenth of households gaining 13pc of their net income – relative to what would have happened if no fiscal changes had been made from 1997 onwards – while the richest tenth lost almost 10pc.

In the 13 years after 1997, absolute poverty (using a poverty threshold indexed to 1997-98) fell by 14 percentage points, lifting 7 million people out of poverty.

Sluggish growth in living standards under the Tories has led to slower progress in reducing poverty since 2010, according to research by the Resolution Foundation think tank.

Over the past 14 years, absolute poverty (where the poverty line is fixed in real terms) has fallen by 3.6 percentage points, lifting a more modest 1.3 million people out of poverty.

Despite New Labour’s redistributive achievements, inequality of income (before housing costs), as measured by the Gini coefficient (the higher the more unequal) rose from the 33pc in the 1996-97 tax year to 36pc in 2009-10, according to the Department for Work & Pensions (DWP).

This was in part a reflection of surging incomes at the top during the long financial boom – the share of wealth held by the top 1pc increased by 0.6pc under Blair’s premiership, a post-war record.

Some groups fared better than others. The number of children and pensioners in relative poverty (after housing costs) – living on less than 60pc of median income – fell significantly in the New Labour years.

Some 400,000 fewer children were in relative poverty by 2010 than had been in 1997 – a reduction from 4.3 million (25pc) to 3.9 million (22pc).

At the same time, the number of pensioners in relative poverty also fell sharply, from an inherited 2.9 million (29pc) in 1996-97 to 1.8 million (15pc) in 2009-10, DWP figures show.

This was in part thanks to inflation-busting rises in the state pension.

The basic state pension was £3,247 when New Labour came to power, equivalent to £6,200 in today’s money. By April 2010, it was up to £5,078, or £7,600 today – a real-terms increase of 22.6pc.

By comparison, the Tories have upped the basic rate by only 16pc in real terms since 2010.

However, the biggest change for pensioners was absent from Labour’s 1997 manifesto, and was quietly slipped through into the party’s first Budget.

Brown’s decision to scrap tax relief on pension fund dividends is estimated to have removed £230bn from the pensions system in the years since.

Previously, if a pension fund was paid £100 in dividends, they got £325 as credit, on the basis that they had already paid corporation tax.

The raid was predicted to raise just £5bn a year, but the loss to pensioners was huge, as they lost out on the growth on the reinvested dividends.

The move is credited with hastening the demise of “gold-plated” defined benefit pensions, which became too expensive for employers.

In stark contrast to children and pensioners, the incomes of poorer working-age adults without dependent children – the major demographic group not emphasised by Labour as a priority – changed very little while the party was in power.

As a result, they fell behind the rest of the population. Relative poverty levels among working age people rose from 6.8 million (21pc) in 1996-97 to 7.9 million (22pc) in 2009-10.

The cost of Labour’s push to level the playing field was a ballooning tax burden.

Benefits spending doubled from £30bn to £62bn over the New Labour era. Tax revenue as a percentage of GDP stood at 29.7pc during the 1996-97 financial year, and hasn’t dipped below 30pc since. The figure stood at 32.4pc in 2009-10 – an increase of 2.7 percentage points.

The rise continued over the next 14 years. In the current financial year, 2024-25, the ratio will hit 36.5pc, according to the OBR’s latest forecast, the highest level since 1949.

Housing boom

New Labour oversaw an unprecedented upswing in house prices.

In May 1997, the average house price in the UK was £62,000, according to HM Land Registry data. By May 2010, this was up to £171,000 – a near threefold increase in nominal terms – having dropped from a high of £190,000 at the height of the 2000s housing bubble in September 2007.

Annual house price growth – the percentage change in average price over the preceding 12 months – peaked in December 2002 at a lofty 28.4pc.

Adjusting for inflation, house prices rose by 152pc over the New Labour years, according to research from Savills.

The boom meant bumper revenues for the exchequer. Stamp duty receipts soared from £3.4bn in 1997-98 to a high of £14.1bn in 2007-08, before dropping back to £7.9bn in 2009-10.

Strong house price growth was underpinned by low interest rates by historic standards. Just days after the Labour landslide, Brown announced that he would make the Bank of England independent.

With inflation rarely topping 2pc between 1997 and 2008 despite strong economic growth, the Bank was able to keep rates down.

Interest rates stood at 5.94pc when Labour came to power, having fallen from 14.88pc in 1989. After hitting a high of 7.5pc in 1998, rates had fallen to 4.5pc by the time the financial crisis hit – when they were slashed to near zero.

The initial fall encouraged homeowners and investors to spend more and lenders to offer larger loans. Buy-to-let also boomed.

The big winners from the house price surge were homeowners who saw their asset’s value skyrocket, in many cases providing a plump nest egg to fund a comfortable retirement.

Less fortunate were those hoping to get a foot on the property ladder.

Wage growth failed to keep pace with rising house prices under New Labour. Full-time employees’ median gross weekly earnings were £320.50 when Blair took office, according to the ONS.

By 2010, this had risen to £498.50 – an increase of 55.5pc in nominal terms, and 21.7pc after adjusting for inflation.

Indexing wages alongside house prices shows the divorce of the latter from the former, particularly up to the bursting of the housing bubble in 2007.

Affordability ratios – calculated by dividing house prices by annual earnings – bear this out. In 1997, the ratio in England was 3.54. By 2010 it had risen to 6.85 (down slightly from 7.15 in 2007), meaning houses became almost twice as unaffordable.

By contrast, between 2010 and 2023 this ratio increased by only 20.6pc. It is during Labour’s time that the ONS’ “affordability threshold” of 5 was crossed – in 2002.