Reeves may need to raise £25bn in taxes to sustain spending
IFS suggests tax hike to balance budget without cutting public spending
Rachel Reeves may need to raise £25 billion through taxes to maintain public spending growth in line with national income, economists warn. The Institute for Fiscal Studies (IFS) highlighted that altering the Conservative debt rule inherited by the Chancellor, which mandates debt to decrease as a share of national income within five years, would barely alleviate public-service funding pressures.
Instead, the IFS suggests Ms Reeves might need substantial tax increases to avoid spending cuts and uphold her commitment to borrow only for investment. According to a report released today by the independent economic research institute, to balance the budget by 2028/29 without cutting public service spending, the Chancellor would require a £16 billion tax increase.
This would be in addition to the £9 billion tax rise outlined in Labour’s manifesto, totalling nearly £25 billion, equivalent to approximately £900 per UK household. However, the party’s promises not to increase income tax, corporation tax, National Insurance, or VAT could make such a tax hike difficult to implement.
Thursday’s TIMES: “Threat of £25bn tax bomb after Reeves vow” #TomorrowsPapersToday pic.twitter.com/qFk3GeqR5z
— Allie Hodgkins-Brown (@AllieHBNews) October 9, 2024
This proposed increase surpasses the net tax rises of £14 billion in July 1997 and £13 billion in October 2010. The report notes: ‘Ensuring all departments’ day-to-day budgets rise at least in line with national income would require an additional £17 billion. Combining this with a new £16 billion (0.5 per cent of national income) tax rise would balance the forecast current budget by 2028-29.
‘This would be on top of the £9 billion of specific tax rises in Labour’s manifesto, totalling about £25 billion. A net tax rise of this size would be larger than those in the July 1997 and October 2010 Budgets, both early in the terms of new governments.’ IFS director Paul Johnson stated that Ms Reeves’ first Budget, scheduled for October 30, could be the most significant since at least 2010.
He added: ‘The new Chancellor is dedicated to boosting investment spending and funding public services. To achieve this, she will need to increase taxes, borrowing, or both. ‘Taxes are at a historical high, and she is limited by her pledges not to raise main rates of income tax or corporation tax, nor increase National Insurance or VAT.
‘The temptation might be to borrow more, potentially redefining the debt targeted by fiscal rules. However, given her commitment to balance the current budget, this would not provide extra resources for day-to-day spending and carries risks due to the UK’s dual deficits – both budget deficit and current account deficit.’
He indicated any changes to capital gains tax should be a ‘careful reform’ rather than a straightforward increase. There is also speculation about potential Labour reforms to inheritance tax.
A spokesperson for HM Treasury commented: ‘We have inherited a challenging financial situation, but we are determined not to let past challenges dictate our future. Despite discovering a £22 billion gap in our public finances, we aim to create the most pro-growth Treasury in history, based on economic stability and robust fiscal rules outlined in the manifesto.
‘This is how we will improve public services and fulfil our promise of change.’ The IFS report, funded by the Nuffield Foundation charitable trust, utilised economic forecasts from the banking firm Citi.
What Other Media Are Saying
- BBC News reports on the week that pushed the Middle East closer to all-out war, emphasizing explosions in Beirut and escalating tensions between Israel and Hezbollah.(read more)
Frequently Asked Questions
Here are some common questions asked about this news
How much might Rachel Reeves need to raise in taxes?
Up to £25 billion.
Why is the £25 billion tax rise needed?
To keep public spending rising in line with national income and balance the budget by 2028/29.
What are the challenges in raising £25 billion in taxes?
Labour’s pledges not to raise income tax, corporation tax, National Insurance, or VAT.
How does the £25 billion tax rise compare historically?
It would be bigger than the net tax increases in July 1997 (£14 billion) and October 2010 (£13 billion).
What alternatives to tax rises are mentioned?
Increasing borrowing or changing the definition of debt targeted by fiscal rules.
