CashNews.co
UK households and businesses could be hit with £25bn in tax raises if chancellor Rachel Reeves is to maintain rising public spending in line with national income, according to the Institute for Fiscal Studies (IFS).
The chancellor has warned ahead of her first budget on October 30 that there will be “tough decisions” but rejected that the country will see a return to austerity.
The IFS said that even if Reeves alters the debt rule she inherited from the previous Conservative government, it would have minimal impact on public service funding. Despite her commitment to financing day-to-day spending through revenues, the chancellor will likely have to resort to tax hikes to avoid cuts and to adhere to her pledge of borrowing only for investment.
In a scenario modelled by Citi, the report concluded that if there are no cuts to spending outside of public services, Reeves would need a tax rise of £16bn to remain on course to balance the budget in 2028-29.
Read more: How the budget could affect your pension, from tax relief to national insurance
This would be on top of the £9bn tax rise from measures set out in Labour’s manifesto — adding up to almost £25bn in total.
However, the Labour party’s commitments not to raise income tax, corporation tax, national insurance, or VAT may complicate efforts to implement such significant tax increases. If executed, these hikes would surpass the net tax rises of around £13bn-£14bn from previous administrations in July 1997 and October 2010.
The prime minister Keir Starmer has not dismissed the possibility of raising employer national insurance contributions or modifying borrowing rules, which could provide some flexibility for Reeves.
IFS director Paul Johnson said any changes to capital gains tax would need to be a “careful reform” rather than a simple increase. There is also speculation that Labour could make changes to inheritance tax.
The think tank said that to cover this year’s pay settlements and maintain public services without cuts, Reeves would need to increase day-to-day spending by approximately £30bn over her predecessor’s plans by 2028-29.
Both Reeves and Starmer have claimed that the Labour government inherited a £22bn “black hole” in public finances from their predecessors.
The IFS noted that the chancellor has inherited an “unenviable” public finance situation as taxes are at a historic high and debt is rising, while public services such as prisons, police and local councils are under strain.
Johnson said: “The first budget of this new administration could be the most consequential since at least 2010.
Read more: Chancellor Reeves urged to change fiscal rules in budget to unlock £57bn
“The new chancellor is committed to increasing investment spending, and to funding public services. To do so, she will need to increase taxes, or borrowing, or both.
“Taxes are at an all-time high, and she is tightly constrained by her pledges not to raise the main rates of income tax or corporation tax, or to increase national insurance or VAT at all.
“The temptation then is to borrow more, perhaps changing the definition of debt targeted by the fiscal rules.
“But, given her pledge to balance the current budget, that would not free up additional resource for day-to-day spending and in any case is not risk-free given the dual deficits — that is, both budget deficit and current account deficit — being run by the UK.”
Citi’s chief UK economist, Benjamin Nabarro, noted some cautious optimism in economic forecasts and the potential for structural reform. However, he warned that the UK’s high debt and current account deficit present budget constraints that limit options available to many other advanced economies.
Reeves will deliver her first autumn statement on 30 October.
Download the Yahoo Finance app, available for Apple and Android.