Rachel Reeves needs a £25 billion tax bomb to deliver on promises and balance the books after her public sector pay splurge, a grim report warned today.
The grim assessment comes from respected think tank IFS, as the Chancellor prepares for the Budget on 30 October.
The massive attack would be almost twice the size of the coalition's austerity measures following the credit crisis – with fears that national insurance, pension funds, inheritance tax and capital gains are in the line of fire.
Keir Starmer stoked alarm at PMQs yesterday by repeatedly refusing to rule out increasing employers' NICs. There is growing speculation that Reeves will impose the levy on company pension contributions, which could potentially raise £17 billion a year.
Tax-free access to pension funds could also be undermined, while many expect increases in inheritance tax and transfers to dairy entrepreneurs.
Rachel Reeves needs a £25bn tax bomb to deliver on her promises and balance the books after her public sector pay bluster, a grim report warned today
The grim assessment comes from respected think tank IFS as the Chancellor prepares for the Budget on 30 October
The 5p cut in fuel tax brought in by Rishi Sunak is also widely predicted to be scrapped.
Meanwhile, Reeves could ease budgetary rules so the government can borrow up to a further £60 billion, despite concerns about rising costs of servicing Britain's £2.7 billion debt mountain. This will be invested in infrastructure spending, with HS2 expected to run as far as Euston and a new “light” link from Birmingham to Manchester being considered.
In the report published today, the IFS concluded that the Chancellor would need a £16 billion tax rise to remain on track to balance the budget in 2028/29, if there are no cuts to spending outside public services.
This would be on top of the £9 billion tax increase resulting from the measures set out in the Labor manifesto, totaling almost £25 billion – the equivalent of around £900 per UK household.
But the party's promises not to raise income tax and corporation tax or to increase National Insurance or VAT mean it may struggle to implement a tax rise on this scale.
It would be greater than the net tax increases recorded in July 1997, which was £14 billion, and in October 2010, which was £13 billion.
The report states: “Ensuring that all departments see their daily budgets rise at least in line with national income would require an additional £17 billion boost. Combining this with a further tax rise of £16 billion (0.5 per cent of national income) would restore the current budget forecast to balance in 2028-29.
“This, of course, would need to be on top of the £9 billion of specific tax increases set out in the Labor Party manifesto, so it would be a tax increase of around £25 billion in total. A net tax increase of this scale would be larger than in the July 1997 and October 2010 budgets, both of which occurred at the start of a new government's parliament.'
IFS director Paul Johnson said Reeves' first budget, which she will deliver on October 30, could be “the most important since at least 2010”.
He added: “The new Chancellor is committed to increasing investment spending and funding public services. To do this, it will need to increase taxes, or loans, or both.
“Taxes are at an all-time high and she is severely constrained by her promises not to raise the top rates of income tax or corporation tax, or to increase Social Security or VAT.
«The temptation then is to borrow more, perhaps changing the definition of debt targeted by tax rules.
But given his promise to balance the current budget, this would not free up additional resources for day-to-day spending and, in any case, is not without risk given the dual deficits – that is, both the budget deficit and the account deficit current – being administered by the United Kingdom.
He said any change to capital gains tax would need to be a “thoughtful reform” and not a simple increase. There is also speculation that the Labor Party could make changes to inheritance tax.
Employers currently pay NICs at 13.8% on wages for workers above £9,100 per year.
But companies don't pay any National Insurance on the money they invest in pensions on behalf of their staff.
The IFS has previously suggested that the rule “should be reformed”, calculating that if employers were charged NI on pension contributions at the same rate as wages – 13.8 per cent – this could raise £17 billion per year.
Tom Selby, director of public policy at stockbroker AJ Bell, said: “This seems like the simplest way to raise money quickly if the government wants to raise money from pensions. It wouldn't be a surprise.
However, Selby said he would expect there to be a reduced tax rate on employer contributions, rather than the full 13.8 percent tax burden.
There were warnings that the move would harm pension funds and undermine efforts to bolster the savings of poorer workers with automatic enrollment.
Keir Starmer stoked alarm at PMQs yesterday by repeatedly refusing to rule out increasing employers' NICs
The 5p fuel tax cut brought in by Rishi Sunak is also widely predicted to be scrapped
During the first clash of PMQs since the party conferences, Mr Sunak asked the Prime Minister whether his pledge not to increase NICs extended to employers' pension contributions.
But Sir Keir limited himself to saying he would not speak about the Budget and claimed that Sunak was the “expert on tax increases”.
A spokesperson for Her Majesty's Treasury said: 'It is correct to say that we have inherited a difficult financial position, but we will not allow the challenges of the past to define our future.
“Despite having discovered a £22 billion black hole in our public finances, we are focused on making this the most pro-growth Treasury in history, built on the rock of economic stability, including robust fiscal rules that were set out in the manifesto .
“This is how we will improve our public services and deliver on the promise of change.”
The IFS report was funded by the Nuffield Foundation's charitable trust and used economic forecasts from banking company Citi.
