The Institute for Fiscal Studies (IFS) warns that Rachel Reeves must raise £25 billion in taxes to prevent public service cuts and avoid a return to austerity measures.
- Tax increases necessary are predicted to be double those implemented by George Osborne in 2010.
- Labour considers raising employer national insurance contributions as a significant revenue source.
- Potential tax changes to include VAT on private school fees and a tougher oil and gas levy.
- Growth in departmental budgets requires an extra £16 billion in addition to the proposed £9 billion tax reform revenue.
Rachel Reeves is faced with a significant fiscal challenge, as the Institute for Fiscal Studies (IFS) highlights the need for a substantial £25 billion tax increase to prevent austerity and maintain promised public service funding. The forecast suggests that the required tax hikes would need to be twice as significant as those introduced by George Osborne in 2010.
One of the primary strategies under consideration is the increase in employer national insurance contributions. This has been identified as a potential measure to raise approximately £8.9 billion, as it does not conflict with Labour’s commitment to avoid raising taxes on ‘working people’. This comes after Sir Keir Starmer left room for such tax policies.
Additional measures being explored include imposing VAT on private school fees and enforcing a stricter levy on oil and gas companies. However, the IFS stresses that these actions alone are insufficient to safeguard public services from cuts.
To align departmental budgets with national income growth, Labour’s proposed tax reforms, estimated to bring in £9 billion, would fall short by £16 billion, thus necessitating the overall £25 billion increase. This surpasses the previous tax hikes under Gordon Brown and George Osborne.
Paul Johnson, the IFS director, emphasises the critical nature of the forthcoming budget, describing it as potentially the most impactful since at least 2010. He notes the necessity of increasing either taxes, borrowing, or both, to meet investment and public service funding commitments.
Additionally, there are considerations to alter pension-related taxes, such as reducing the tax-free lump sum at retirement and changing inheritance rules concerning pension pots. The IFS forecasts these significant tax hikes are essential, even under optimistic economic conditions, given the rising welfare costs associated with an ageing population and increasing debt interest payments.
The IFS firmly states that substantial tax increases are imperative to balance public finance and service commitments.
