The Institute for Fiscal Studies (IFS) has highlighted a pressing concern for Rachel Reeves, forecasting a need for substantial tax increases in the upcoming budget to avoid austerity measures.
- A £25 billion tax hike is deemed necessary to ensure the continuation of promised public spending and to prevent budget cuts.
- Reeves is considering options like increasing employer national insurance contributions and introducing new taxes on private school fees and the oil and gas sector.
- The IFS predicts that even with these measures, an additional £16 billion in tax increases would be required to align departmental budgets with national income growth.
- Significant fiscal adjustments are anticipated regardless of economic optimism, especially due to growing welfare costs and debt interest payments.
The Institute for Fiscal Studies (IFS) has raised alarm bells for Rachel Reeves, suggesting that to avoid austerity, a significant tax increase of £25 billion is required in the upcoming budget. This recommendation comes as the IFS warns that public spending must be maintained as promised, and the fiscal rules are expected to be relaxed.
Among the proposals, Reeves is evaluating an increase in the national insurance contributions paid by employers, a move Labour leader Sir Keir Starmer has not ruled out. Such an increase, by just 1%, could potentially generate £8.9 billion. This measure is part of Labour’s approach, which excludes tax raises on ‘working people’, focusing instead on employer contributions.
Additionally, new taxation measures, such as applying VAT to private school fees and imposing stricter taxes on oil and gas companies, are under consideration. However, the IFS cautions that these alone would not suffice. The organisation estimates that these tax reforms could generate around £9 billion, still leaving a shortfall of £16 billion to meet the financial demands.
The historical context shows that the suggested tax increases would surpass those implemented by Gordon Brown in 1997 and George Osborne in 2010. Paul Johnson, Director of IFS, remarked that the forthcoming budget could be the most consequential since 2010. He highlighted the necessity for the new chancellor to increase taxes, borrowing, or both to fund public services and boost investment spending.
Reeves may also explore modifications to pension rules, potentially decreasing the tax-free lump sum from £268,275 to £100,000 and altering pension pot rules post-mortem. The IFS asserts that even with favourable economic conditions, significant tax hikes are inevitable to rebalance the budget, particularly as welfare expenses rise due to an ageing population and increasing debt interest payments.
A formidable fiscal challenge lies ahead for Rachel Reeves, with significant economic and budgetary constraints necessitating careful fiscal policy adjustments.
