Reeves told to break promises and raise taxes in November
The upcoming Budget is likely to come with a significant downgrade to the fiscal outlook, with pressures from recent policy reversals, rising debt-interest costs, and a gloomier economic outlook, says Labour-focused Think Tank the Resolution Foundation.
The think tank warns that Chancellor Rachel Reeves faces a difficult Autumn Budget on 26 November as annual borrowing could be £20-£40 billion, or more, above the Office for Budget Responsibility’s March forecast.
To address this shortfall, tax must play a key role, the group said. Increasing revenues in this way generally comes at the cost of lower growth and living standards. The job for the government then is minimise those impacts while trying to maximise potential positives, it said.
While this goes against earlier promises made by Reeves, a focus on tax system reforms could increase efficiency while protecting employees as far as possible, it said. This can be achieved by providing a clear tax strategy that puts the system on an improving path and also reinforces other policy goals, including boosting fiscal credibility.
Some of the specific proposals detailed by the Resolution Foundation include:
- Arbitrary tax differences across businesses should be reduced, to support productivity growth via fair competition. The small business tax gap needs to be brought back down; the VAT threshold should be greatly reduced; partners in Limited Liability Partnerships at least should be asked to pay an equivalent of employer National insurance; and pension salary sacrifice should be dialled down.
- Some personal taxes will need to rise, but this can be done while largely protecting employees given existing unfair and distortionary tax differences. A 2p rise in Income Tax rates, while also reducing employee National Insurance by 2p would deliver a range of tax system improvements, while also raising £6 billion from those income sources that benefit from the different coverage of the two taxes. In the fiscal circumstances, the personal tax threshold freeze should also be extended for a further two years. Meanwhile, the basic rate of dividend tax should rise, and loopholes in the Capital Gains Tax system that particularly benefit the extremely wealthy should be closed.
- Additional revenue could be raised through reasonable taxes on harms, for a greener and healthier country, while trying to avoid sustaining high inflation in the short-term. The Fuel Duty freeze needs to end and we suggest a more credible new uprating regime to facilitate that; VED should be reformed for future sales, including a weight and mileage link for electric vehicles; carbon pricing should be broadened; gambling duties streamlined; and a Sugar and Salt Reformulation Tax introduced.
- Together these measures could raise over £30 billion in 2029-30 – with directions of travel for going further if needed – while boosting fiscal credibility in additional ways and allowing inflation and interest rates to come down.
