Rachel Reeves has been warned that raising any taxes in her November Budget will hit economic growth. The Institute for Fiscal Studies (IFS) warned that the Chancellor has “no easy options to raising revenue” and reiterated expectations that she will have to raise taxes to avoid breaking her self-imposed spending rules.
The top economic think tank said Ms Reeves’s fiscal “headroom” has been wiped out thanks to both U-turns on welfare cuts and a downgrade in economic productivity forecasts, which will cost the UK at least £10billion. In a pre-Budget briefing on Sunday, the IFS suggested Ms Reeves will be required to find at least £30billion in either spending cuts or tax rises. But politically, it is unlikely Labour backbenchers will allow her to cut spending after rebellions on both winter fuel and disability welfare cuts.
However, economist Stuart Adam said the Chancellor will not be able to find £30billion-worth of tax rises “without having some effect on growth”, a key pledge from Labour.
The IFS said that the easiest way to find the much-needed cash would be a rise in income tax. However, it believes Ms Reeves will not breach her manifesto pledge not to raise taxes on working people, which Labour specified as income tax, National Insurance or VAT.
In a further pointed warning, the think tank warned that while freezing income tax thresholds until 2030 would hand her a whopping £10.4billion, freezing National Insurance thresholds would count as a breach of her manifesto pledge, further restricting her options for revenue raising.
The next four taxes to raise the largest amount of money for the exchequer – corporation tax, council tax, business rates and fuel duties – are equally unlikely to raise large amounts of money and prove politically difficult.
They suggested a row could be brewing over the longstanding freeze in fuel duty, which the Office for Budget Responsibility has assumed will be unfrozen next year with a resumption of the levy rising in line with inflation.
If Ms Reeves were to stick to the 14-year-long fuel duty freeze, it would lose her nearly £5.5billion in revenue.
The IFS also poured cold water on a wealth tax, something being demanded by both left-wing backbenchers and hard-left opposition parties like the Greens.
Mr Adam pointed out: “Norway and Spain’s wealth taxes don’t raise very much revenue at all. The country that has a wealth tax that does raise significant amount of revenue – more than 1% of GDP rather than 0.1% of GDP is Switzerland.
“But Switzerland essentially doesn’t really have a capital gains tax or an inheritance tax, so their wealth tax is essential instead of those taxes.
“There are reasons wealth taxes haven’t done very well internationally, and while they do still exist in Norway, Spain, and Switzerland, they have been abolished in every other rich country that had them.
“The more you try and focus it on a very small number of very rich people, or try and soften it by taking out a lot of assets like exempting houses and pensions, the harder it gets to raise significant amounts of revenue and the more you risk distorting activity.
“If you’re really trying to raise very large sums from very small numbers of people, there’s a risk that they might just leave the UK completely.”
Ms Reeves will deliver her second Budget on November 26.