Rachel Reeves, the chancellor, is expected to introduce a £25 billion tax increase in this month’s budget to avoid pushing Britain back into austerity, according to the Institute for Fiscal Studies (IFS).
The IFS has warned that tax rises will need to be twice as big as those introduced by George Osborne in 2010 to ensure public spending can rise as promised, even with looser fiscal rules.
Reeves is said to be looking at increasing employers’ national insurance contributions as a key option, after Sir Keir Starmer refused to block the move. Labour’s manifesto pledge to avoid tax rises on “working people” excludes employer contributions, and a 1% increase could generate an estimated £8.9 billion. Labor is also considering measures such as adding VAT to private school fees and imposing a stiffer tax on oil and gas companies, but the IFS warns that these measures alone will not raise enough to protect public services from further cuts.
The IFS estimates that even if Labour’s proposed tax changes make £9 billion, a further £16 billion in tax increases will be needed to ensure the department’s budget grows in line with national income, making a total of £25 billion in tax increases required. This will surpass the tax increases introduced by both Gordon Brown in 1997 and Osborne in 2010.
Paul Johnson, director of the IFS, said, “The first budget of this new administration would be the biggest result since at least 2010. The new chancellor is committed to increasing investment spending, and funding public services. To do that, he will need to raise taxes, or borrow, or both.”
Reeves is reportedly exploring changes to pensions, such as reducing the tax-free amount people can take in retirement from £268,275 to £100,000, as well as reforming the rules on pension pots that are passed on after death.
The IFS predicts that even with promising economic forecasts, significant tax increases are needed to balance the books, especially as social costs rise due to an aging population and rising debt payments. A spokesman for the Treasury said the government is focused on making the UK economy more prosperous despite the challenges.