UK Chancellor Reeves Warned Against “Half-Baked” Tax Increases Amid Budget Concerns
The UK Chancellor, Rachel Reeves, faces mounting pressure to avoid implementing poorly considered tax hikes as she prepares to address a significant budget gap next month. The Institute for Fiscal Studies (IFS) cautioned that a “half-baked dash for revenue” could inflict “unnecessary economic damage” and hinder economic growth, particularly if the measures are unrelated and lack a cohesive strategy.
The IFS, a leading tax and spending thinktank, highlighted that while Reeves could potentially raise tens of billions of pounds without violating Labour’s manifesto commitments, increasing taxes on established, inefficient systems could negatively impact work incentives, productivity, and overall economic expansion. “A budget focused purely on the politics could prove considerably worse on the economics,” one analyst from the IFS stated.
Reeves has already ruled out increases to income tax, national insurance, and Value Added Tax (VAT) ahead of the upcoming budget, widely considered a pivotal moment for the government following a challenging initial 15 months in office. While options like spending cuts or increased borrowing exist, both face considerable headwinds. Recent attempts at austerity measures have been thwarted by dissenting Labour MPs – most notably, reversals on reductions to universal credit payments – and high government borrowing rates are discouraging further debt accumulation.
Treasury officials are currently evaluating a range of tax-raising options to bridge a spending gap estimated between £20 billion and £30 billion. Compounding the challenge, Reeves is reportedly aiming to double the existing £10 billion budget buffer to approximately £20 billion, providing greater financial flexibility in the face of potential economic shocks.
The IFS assessment paints a picture of the UK being “in a fiscal bind,” but suggests opportunities for revenue generation through comprehensive reforms to taxes on savings and investment income. These include taxes on rental income, dividends, interest, self-employment profits, and capital gains.
Specifically, analysis from the IFS Green Budget indicates that adjustments to pension taxation could yield billions in additional revenue. This includes levying national insurance contributions on employer pension contributions and potentially limiting the 25% tax-free access currently available to retirees. “Employer [national insurance contributions] could be levied in full on all employer pension contributions, and replaced with a 10% subsidy on all employer pension contributions. This would raise around £6bn a year,” the report detailed.
Furthermore, the IFS identified a potential £10 billion windfall from addressing a growing tax gap, particularly among small businesses, which are currently estimated to be paying only 40% of the tax they owe. Closing this gap – or even returning it to 2017-18 levels – could significantly boost government revenue, potentially exceeding £10 billion. “In 2029–30 terms, a corporation tax gap of that size would represent more than £24bn of forgone revenue,” the report stated.
Isaac Delestre, a senior research economist at the IFS and author of the chapter, emphasized the need for a strategic approach. “Revenue-raising seems likely to be a major goal of the coming budget. But if Rachel Reeves limits her ambition to collecting more revenue, she will have fallen short,” he said. “Almost any package of tax rises is likely to weigh on growth, but by tackling some of the inefficiency and unfairness in our existing tax system, the chancellor could limit the economic damage. The last thing we need in November is directionless tinkering and half-baked fixes.”
