Few expect Andy Burnham’s extended political honeymoon to last beyond the October 28 budget. The fiscal position is precarious. The bond vigilantes are signalling their nervousness about the UK in the form of 10 year bond yields of 5.4% : the highest of developed economies (despite some nice comments from the IMF). The public will expect to see some evidence of the Prime Minister’s commitment to spend more on defence, employment for young people, affordable housing, meeting the NHS and social care needs of an ageing population, together with some relief from high energy costs, which may spiral further if Trump returns to war with Iran after the mid-term elections on November 5. A promise to defer difficult budget decisions until next year will not convince markets.

The tax options are seriously constrained by the unnecessary pre-election promise not to raise VAT rates or the rates of income tax and employees NICs. Taxes are already approaching 40% of GDP, a post-war high. But more will be needed. The government has, however, already discovered that seemingly easy options targeted at companies and rich people can backfire. Rachel Reeves’ increase in employers’ NICs has angered employers and threatens jobs. A tax raid on inheritance has proved to be less of a tax on rich heirs to family fortunes than a major threat to family farms and firms. Some big taxpayers amongst the ‘non-doms’ have emigrated rather than pay more tax. VAT receipts on private school fees have had to be netted off against the costs of educating children of less affluent families who have migrated to the state sector. Successive attempts to hit the well off by salami-slicing pension tax relief have undermined savings. Gordon Brown’s seemingly innocuous ending of tax relief on company dividends helped to end DB pension schemes. Clever schemes to combat cleverer tax avoidance have added to complexity and economic distortions. The Law of Unintended Consequences is unforgiving.

Taxation is unpopular and so is ‘austerity’ applied to popular public services. Politicians who want to be liked, or win elections, face a dilemma: how to raise revenue painlessly while avoiding damaging unintended consequences. Experience tells us that it is impossible to square this circle. Taxes on companies are hidden from the public but are mainly passed on in -unpopular – higher prices or by reductions in investment. Taxes on rich people may be popular with people who aren’t rich but rich people are potentially mobile and able to afford tax advice on avoidance techniques. Wealth taxes have been largely abandoned except where they are very small (as in Switzerland). Property is not mobile but the taxation of family homes is deeply unpopular with the public outside of ‘mansions’. These problems are unlikely to deter Mr Healey from trying to squeeze a bit more from Capital Gains Tax (which can deter the establishment of new businesses), tax relief on pension contributions (deterring savings) or high-value property (which can’t be isolated from the wider property market). These all tick the box marked ‘fairness’ but they represent the last bit of a much squeezed toothpaste tube.

Another politically popular wheeze is to tax ‘windfall’ profits which accrue to unpopular companies that have profited greatly from events beyond their own efforts: commodity price spikes or regulatory change. Oil and gas companies are a nice, easy target and they are currently enjoying windfall profits from the interruption of energy supplies in the Persian Gulf which have inflated crude and product prices. But there are already windfall taxes, dating from the last tax raid in 2022, which have taken the effective tax rate on North Sea profits to 78%. The ratcheting of tax rates is a serious deterrent to investing – over and above environmental objections – especially from oil majors which operate globally. The government has had to accept the need for a tax mechanism (OGPM) which reflects the cyclical nature of profits. So, nothing to tax, there.

Then there are the banks which are enjoying windfall profits from the lag between rising interest rates on loans and interest on deposits. There is also a second windfall from ‘quantitative tightening’ (QT) where the Bank of England has been selling its stock of government bonds to the banks which earn more from the yields on the bonds than they pay for cash to hold as reserves (though QT has now stopped). But banks are already taxed over and above normal business taxation. There is a bank levy (which I claim some credit for, insisting in the Coalition that banks should pay ‘insurance’ for being ‘too big to fail’). There is also a bank surcharge and bonus taxation. The banks also complain that they have had a miserable time since the financial crisis with returns to equity below the cost of capital, leading international investors to go elsewhere. They argue, furthermore, that further taxes will be passed on in reduced or more expensive lending to SMEs – though this is a rather feeble argument as the banks are extremely risk averse and already starve SMEs of credit: the main reason I established the British Business Bank. The banks are no more deserving of compassion than they are of revenge for their past conduct two decades ago. On balance, there is a case for a modest ‘windfall’ tax raid provided there is, as in the oil and gas industry, a mechanism which recognises the cyclical nature of the business and stops endless ratcheting upwards.

Overall, the scope for ‘painless’ taxes is becoming exhausted. The government will soon be forced to choose between breaking its promise not to raise – transparent – taxes on income and spending or embark on a new era of public spending ‘austerity’. Either way, the Chancellor and the Prime Minister should prepare themselves for being hated by almost everyone.

* Sir Vince Cable is the former MP for Twickenham and was leader of the Liberal Democrats from 2017 until 2019. He also served in the Cabinet as Secretary of State for Business, Innovation and Skills from 2010 to 2015.