Kemi Badenoch’s promise to abolish stamp duty has ducked tax trade-offs

In a Conservative conference filled with a slew of policy announcements, Kemi Badenoch saved her biggest headline-grabber until last with a promise to abolish stamp duty on main homes for UK residents. This a policy which the shadow cabinet will be able to throw at government ministers - who could find themselves in the awkward position of trying to attack an opposition policy while avoiding defending an unpopular tax. But while the politics behind Badenoch’s move might add up, this huge giveaway does not. It would cost almost £10 bn by the end of the parliament, and more if Scotland and Wales, where the tax is devolved, followed suit. 

Every economist will tell you that stamp duty is a bad tax, and if taxes are going to be cut then it is a good candidate. But big and expensive pledges are easier to make in opposition. If they want a credible economic vision, Badenoch and Mel Stride, her shadow chancellor, need to explain better how this change would fit with their broader tax vision and claims to be the party of fiscal responsibility.

Stamp duty is a bad tax

Taxes on transactions are among the most economically damaging. They mean assets that are traded more often attract a higher tax bill, and so disincentivise transactions that would otherwise be desirable to both parties. In the case of housing, this reduces labour mobility. By making it harder for people to move to areas where jobs are located, it is also a major disincentive to downsizing, meaning more older people stay in larger homes, unable to access the equity held within them or to free up larger properties for younger families. This is bad for people who might enjoy a lower standard of living than they otherwise might, and for society as a whole because housing is not spread as efficiently. 

Removing stamp duty should be part of a tax reforming package

Even though removing stamp duty would yield an economic benefit, it would still be a costly measure and amount to a big giveaway. With the fiscal pressure of an aging population making tax cuts  hard to afford, any giveaway should be used to sweeten the pill of much-needed tax reform elsewhere. A reduction or abolition of stamp duty should be accompanied by a fundamental reassessment of property taxes in the round, including council tax, and form part of a package that included an increase in the annual charge on homes. This would be more economically efficient and much less expensive than abolishing stamp duty on its own. 

Packaging measures together, and getting the sequencing and narrative right, is key to delivering successful tax reform. Philip Hammond’s attempt to increase National Insurance for the self-employed in 2017 came only a year after changes to the state pension which benefited the self-employed. Hammond tried to argue that this increase in benefit entitlement justified his tax increase. But because the benefit change had been announced first, the subsequent tax increase was depicted as an unjustified raid on the self-employed. While it is tempting to announce giveaways first, this undermines sensible and sustainable tax reform.

Such a big giveaway could undermine the Conservative fiscal strategy

Mel Stride attempted to set the tone for the Conservative conference, announcing £47bn of savings and claiming that only the Conservatives were the party of fiscal responsibility, in contrast to Reform and Labour. Badenoch sought to strengthen that with her ‘golden economic rule’ to use at least half of any savings to reduce the deficit. 

Through pledging to reverse various government policies, like VAT on school fees, and additional announcements on business rates, NICs and stamp duty, the Conservatives have announced over £20bn of giveaways at this conference. This would fit within Badenoch’s golden rule, but only if the £47bn of savings actually materialised. The spending cuts proposed by the Conservatives so far have shaky foundations:

• Welfare savings of £23bn – one sixth of the working age welfare bill – would be unprecedented and the Conservatives have not yet spelt out enough detail of how they expect to achieve this.
• This government is already reducing asylum spending.
• Cuts to the civil service would be difficult to implement and entail difficult choices about what government would need to stop doing. 

Delivering big giveaways and then being unable to deliver promised savings later risks losing, rather than regaining, fiscal credibility.

Attention will soon turn from conference season to chancellor Rachel Reeves’ budget at the end of November. That event will demonstrate that the constraints of government are far more testing than those of opposition. Reeves should consider cuts to stamp duty as part of a wider pro-growth tax reforming package, but fiscal reality will mean taxes will go up overall. If the Conservatives want to be the credible party of fiscal restraint, they would do well to acknowledge those trade-offs more honestly rather than announcing enormous permanent tax cuts on the back of vague savings.