Chancellor Rachel Reeves has the potential to generate significant revenue through tax reforms while staying in line with Labour’s manifesto commitments, according to leading economists. As Parliament reconvenes from the conference recess, focus shifts to the upcoming Budget, which is crucial for the government. There are concerns that Reeves may need to address a financial gap of £20 billion to £30 billion in order to adhere to her spending constraints.
The Institute for Fiscal Studies suggests that while challenging, it is feasible for Reeves to raise substantial funds without increasing VAT, income tax, or employees’ national insurance contributions as promised during the election. However, the think-tank cautions that alternative tax-raising measures could have adverse impacts on economic growth and welfare.
Various options proposed by the IFS include eliminating capital gains tax relief upon death, potentially raising £2.3 billion in 2029-30. Additionally, doubling the council tax rate on higher property bands could generate £4.2 billion, with the possibility of reallocating funds to local councils. Extending a freeze on personal tax thresholds, including national insurance, could also yield around £10.4 billion annually, though this might conflict with Labour’s pledge not to increase taxes for the working population.
The think tank advises against restricting income tax relief on pension contributions and emphasizes the risks associated with an annual wealth tax, a proposal advocated by some left-wing MPs. Isaac Delestre, a senior research economist at the institute, emphasizes the importance of broader tax reforms to avoid solely pursuing revenue increases. He underscores the need for strategic tax adjustments that address inefficiencies and inequalities in the current system to mitigate potential economic repercussions.
In light of the upcoming Budget, Delestre urges the Chancellor to implement meaningful changes towards a more coherent tax system that fosters the prosperity and well-being of taxpayers, rather than resorting to ad hoc solutions.
