Liam Byrne has warned the chancellor that extra levies on the rich are needed to halt the rise of the populist right

Victorian properties in Eaton Square, Belgravia, London: ‘Almost 60% of UK investment income goes to the richest 10% of households,’ says ex-Labour minister Liam Byrne. Photograph: RichardBaker/Alamy

A failure by Rachel Reeves to back a “windfall of wealth taxes” in her budget risks fuelling the rise of the populist right, a former Labour ­cabinet minister has warned.

Liam Byrne, a senior figure in the New Labour government and chair of the Commons business and trade committee, said that the rise of Reform UK at the last election meant the chancellor and Keir Starmer must urgently consider raising funds to deal with inequality.

With Reeves desperately hunting for revenue-raising measures to pay for a public investment drive, Byrne said she should consider raising capital gains tax (CGT) to the same level as income tax, closing inheritance loopholes exploited by the wealthy, cutting tax breaks for rich pension savers and charging national insurance contributions on investment income.

His comments come as new analysis suggests a strong correlation between wealth inequality and the popularity of Reform at the election, when it secured more than 4m votes and won five seats. Senior figures in both main parties fear that continuing disillusionment with politics among the public could see Reform’s support continue to rise.

The average wealth of the top 1% has risen by £2.2m since 2010, about 41 times more than the rise in average wealth of the rest of society, according to new research commissioned by Byrne for the updated version of his book The Inequality of Wealth: Why It Matters and How 

Byrne said he was a “card-carrying member of New Labour”, but was “now convinced” that a series of wealth taxes were needed. “The way to raise the cash to rebuild Britain is to restore fairness to Britain’s taxes,” he said. “If we fail, my new analysis of the 2024 election shows the demand for the snake-oil of populism will simply grow.”

The Reform vote is lower in areas where house prices are higher, while property prices are about a third lower than the national average in constituencies with the top 20 ­highest Reform votes. About 8% more of the people in those constituencies are living in deprivation compared with the national average.

“Just to add insult to injury, those lucky enough to draw their income from capital enjoy a rate of tax that is much lower than everyone else’s,” said Byrne. “Almost 60% of UK investment income goes to the richest 10% of households.

“The bottom line is this. Taxes on capital income need to go up and if we do it in the right way we can use that money to help reverse the extraordinary growth of wealth inequality that now deeply divides our country.”

Reeves has said that she is aiming for a budget dedicated to investment, which is expected to be paid for with a finessing of fiscal rules to borrow more. Some tax rises and welfare cuts will form part of her budget. However, there is frustration throughout Whitehall that the government has boxed itself in by ruling out increases in incomes tax, employee national insurance contributions and VAT.

Reeves wants to ensure that the public spending watchdog, the Office for Budget Responsibility, takes full account of the value of public investment she is set to announce on 30 October.

Such a move would make its economic forecasts more optimistic, increasing projected revenues to the public purse as a result of higher growth. She has ruled out a new wealth tax applied directly to the ­richest, as demanded by one of Labour’s biggest financial backers, the Unite union. However, she is said to be looking at increasing CGT, which is now set lower than income tax. Raising CGT to the same level as income tax for higher earners could raise between £8bn and £16bn and was a policy pursued by Tory chancellor Nigel Lawson in 1988. However, equalising it now would see a steep rise in CGT, prompting critics to warn of an exodus from the country by the wealthy.

New research from the Institute for Fiscal Studies has found that the ­disparity between the rates of income tax and CGT are “unfair and create undesirable distortions”. It calls for a complete overhaul of the tax, ­including the end of a rule that means CGT is not paid after someone’s death. “With a reformed tax base, tax rates should ultimately be aligned across all forms of gains and income,” it states. “This would involve significant increases to CGT rates.”