Chancellor Rachel Reeves has the potential to generate substantial revenue through tax reforms while adhering to Labour’s manifesto commitments, as noted by prominent economists. The focus shifts to the critical upcoming Budget session following Parliament’s return from the conference recess today. Concerns have been raised about a significant financial gap of £20 billion to £30 billion that Ms. Reeves must address to maintain fiscal discipline.
According to the Institute for Fiscal Studies (IFS), while it would be challenging, it is not unfeasible for her to raise funds without increasing VAT, income tax, or employees’ national insurance contributions, as promised during the election campaign. However, caution is advised, as alternative tax-raising measures could have adverse effects on economic growth and societal well-being.
The IFS presented several options, such as eliminating capital gains tax relief on inheritance to generate £2.3 billion in revenue by 2029-30. Additionally, doubling the council tax rate for the top two property bands could raise £4.2 billion, with the potential for redirecting these funds to local councils by reducing grants.
Extending the freeze on personal tax thresholds, including national insurance, could yield approximately £10.4 billion annually by 2029-30. Nevertheless, this approach would contradict Labour’s pledge not to burden working individuals with tax hikes. The IFS also cautioned against limiting income tax relief on pension contributions and rejected the proposal for an annual wealth tax, which has been proposed by some left-wing MPs.
Isaac Delestre, a senior research economist at the IFS, emphasized the importance of comprehensive tax reforms over mere revenue generation, highlighting the necessity of addressing inefficiencies and inequities within the existing tax system to mitigate any negative economic impacts. He stressed the need for purposeful tax reform in the upcoming Budget to foster prosperity and enhance the well-being of taxpayers.