British households and businesses could face a £25bn tax rise if Chancellor Rachel Reeves keeps public spending rising in line with national income, according to the Institute for Fiscal Studies (IFS).
The Chancellor warned that “tough decisions” would be made ahead of the first Budget on October 30, but ruled out a return to austerity.
The IFS said that even if Mr Reeves were to change debt rules inherited from the previous Conservative government, the impact on public service funding would be minimal. Despite her pledge to meet day-to-day spending through revenue, the chancellor is likely to have to resort to tax increases to avoid cuts and keep her promise to borrow only for investment purposes.
The report concluded that under the scenario modeled by City, Leaves would need to raise taxes by £16bn to balance the budget in 2028-29 if non-service spending is not cut.
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This is on top of the £9bn tax increase set out in Labour’s manifesto, bringing the total to almost £25bn.
However, Labor’s pledge not to increase income tax, corporation tax, national insurance or value added tax could complicate efforts to implement such a significant tax increase. If implemented, these tax increases would exceed the net tax increases of around £13 billion to £14 billion made by the previous government in July 1997 and October 2010.
Chancellor Keir Starmer has not ruled out raising national insurance contributions for employers or changing borrowing rules, which could give Mr Reeves some flexibility.
IFS director Paul Johnson said changes to capital gains tax required “careful reform” rather than a simple tax increase. There is also speculation that Labor may make changes to inheritance tax.
The think tank said Mr Reeves would need to increase daily spending by around £30bn by 2028-29 compared to his predecessor’s plans to cover this year’s payrolls and keep public services intact without cuts. said.
Both Mr Reeves and Mr Starmer claim that the Labor government inherited a £22bn ‘black hole’ in the public finances from its predecessor.
The IFS said the chancellor inherited an “enviable” fiscal position, with taxes reaching historic highs and debt rising, while public services such as prisons, police and local councils are strained.
“This new government’s first budget could be the most important since at least 2010,” Johnson said.
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Read more: Treasurer Reeves calls for changes to budget fiscal rules to free up £57bn
“The new chancellor is committed to increasing investment spending and funding public services, which will require increasing taxes, borrowing or both.
“Taxes are at an all-time high and she is severely constrained by a pledge not to raise key rates of income tax or corporation tax, or to raise national insurance or value added tax at all.
“In that case, there would be a temptation to borrow more and perhaps the definition of debt subject to fiscal rules would change.
“However, given her current commitment to balance the budget, it will not free up additional resources for day-to-day spending and will in any case take into account a double deficit, i.e. both a budget deficit and a current account deficit. And it’s not without risk” — run by the UK. ”
Benjamin Navarro, chief UK economist at Citi, said there was cautious optimism about economic forecasts and the potential for structural reform. But he warned that the UK’s high debt and current account deficit created budgetary constraints, limiting the options available to many other advanced economies.
Reeves will issue his first statement of the fall on October 30th.
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