Chancellor Rachel Reeves is being advised by prominent economists that significant revenue could be generated through tax reforms without violating Labour’s manifesto commitments. As Parliament reconvenes following the conference recess, focus is shifting towards the critical Budget scheduled for next month. Concerns have been raised about a £20 billion to £30 billion shortfall in public finances that Reeves needs to address while adhering to her spending guidelines.
According to the Institute for Fiscal Studies (IFS), it is feasible, though challenging, for Reeves to raise substantial funds while honoring Labour’s pledge not to increase three major taxes: VAT, income tax, and employees’ national insurance contributions. However, the IFS cautions against hasty decisions, emphasizing that alternative tax measures could have adverse impacts on economic growth and welfare.
Among the proposals put forth by the IFS is the elimination of capital gains tax relief on inheritance, potentially yielding £2.3 billion by 2029-30. Additionally, doubling the council tax rate for the top two property bands could generate £4.2 billion, with the option for Reeves to reduce grants to local councils to bolster the Treasury’s resources.
Extending the freeze on personal tax thresholds, including national insurance, is projected to generate approximately £10.4 billion annually starting in 2029-30. However, this approach would contradict Labour’s commitment to avoiding tax hikes for British “working people.” The IFS also advises against restricting income tax relief on pension contributions and cautions against implementing an annual wealth tax, a proposal supported by some left-wing MPs to raise significant funds.
Isaac Delestre, a senior research economist at the IFS, underscored the importance of broader tax reform alongside revenue generation, warning against short-sighted tax measures that could stifle economic growth. He urged Reeves to seize the opportunity presented by the upcoming Budget to address inefficiencies and inequities in the tax system, promoting prosperity and well-being for taxpayers.