Chancellor Rachel Reeves has the potential to generate substantial revenue through tax reforms without violating Labour’s election promises, according to prominent economists.
As Parliament reconvenes from the conference recess, focus shifts towards the upcoming Budget in the following month, which is deemed crucial. Concerns have been raised about a significant £20 billion to £30 billion deficit in public finances that Ms. Reeves must address to adhere to her fiscal guidelines.
The Institute for Fiscal Studies (IFS) has indicated that while challenging, it is feasible for her to raise funds while abiding by Labour’s commitment not to increase VAT, income tax, and employees’ national insurance contributions.
However, the IFS cautions against overlooking the potential negative impacts of alternative tax-raising measures outside the aforementioned categories on economic growth and welfare. One proposed option involves eliminating capital gains tax relief on inheritance, potentially yielding £2.3 billion by 2029-30.
Another suggestion by the IFS includes doubling the council tax rate for the top two property bands, which could generate £4.2 billion. Although this revenue would benefit local councils, adjustments could be made to reduce grants to these councils to bolster the Treasury’s funds.
Extending the freeze on personal tax thresholds, including national insurance, is projected to raise approximately £10.4 billion annually from 2029-30, but this approach would breach Labour’s commitment not to raise taxes for working individuals in the UK.
The IFS also advises against limiting income tax relief on pension contributions and warns against implementing an annual wealth tax, a proposal supported by some left-wing MPs to generate substantial revenue.
Isaac Delestre, a senior research economist at the IFS, emphasized the importance of broader tax reform rather than solely focusing on revenue generation. He stressed the need for strategic tax adjustments to minimize economic repercussions and enhance the efficiency and fairness of the current tax system.
Delestre urged the Chancellor to use the upcoming Budget as an opportunity to pave the way for a more rational tax structure that promotes the prosperity and well-being of taxpayers, cautioning against haphazard tax policy changes without a clear direction.