Impending Tax Hikes and Fiscal Challenges: Chancellor Reeves Faces a Pivotal Budget

The Institute for Fiscal Studies has issued a warning that the Chancellor might have to increase taxes by £25 billion. Rachel Reeves is set to deliver her inaugural budget on October 30, a budget that Paul Johnson, the institute's director, believes could be the most significant since 2010 or earlier.

Political reporter @gurpreetnarwan

Thursday, October 10, 2024, 03:

The Institute for Fiscal Studies (IFS) has indicated that the chancellor must increase taxes by £25 billion to maintain government spending in line with the growth of the national income.

In its yearly 'Green Budget' report, the Institute for Fiscal Studies cautioned that to address the demands on public services, the government will need to significantly boost the £9 billion in tax increases that were proposed in its platform.

The chancellor is expected to adhere to her budgetary principle that mandates current expenditures be covered by tax income, prohibiting any increase in borrowing to address shortfalls.

Rachel Reeves is set to unveil her inaugural budget in the Commons on October 30. Paul Johnson, the head of the Institute for Fiscal Studies, described this budget as potentially "the most significant since at least 2010".

The recently elected Labour administration has committed in its platform to boost government funds by £5 billion and is allocating £9 billion to resolve salary disagreements in the public sector.

If Labour sticks to the budgetary framework set by the former government in 2021, it would achieve a surplus of £17 billion.

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Nevertheless, these financial proposals are viewed as highly impractical and would result in actual reductions to budgets that are not safeguarded.

Public enthusiasm for additional reductions in government expenditure is waning, potentially prompting the chancellor to safeguard these budgets against inflationary pressures. This approach might result in a £1 billion surplus.

Should she choose to maintain spending proportional to the national income, which more accurately accounts for population growth, she would face a £16 billion deficit.

Together with the previously announced £9 billion in tax hikes, this would result in a total tax increase of £25 billion, pushing the tax load to the highest it has been in decades.

Excessive borrowing strategies may trigger a buyer's strike in the UK

Political correspondent

The UK could face a standoff from bond market investors if the chancellor pursues excessively ambitious borrowing strategies.

Rachel Reeves is anticipated to present proposals for boosting investment borrowing in her upcoming Budget announcement on October 30.

Despite having a policy that mandates reducing debt relative to GDP within five years, she might alter her definition of debt to create more leeway for herself.

In this process, she might identify as much as £50 billion in extra fiscal space. Nonetheless, the Institute for Fiscal Studies cautioned the government about taking on such a significant amount of debt.

Experts in economics have advised that the chancellor should approach any increases in borrowing with caution and consistency, ensuring that entities like the National Audit Office fully monitor the process.

Observers point out that the UK faces a higher liquidity risk compared to its neighbors, such as the EU, making it more vulnerable to shifts in investor attitudes.

The proposed increase would surpass the tax hikes of July 1997 and October 2010, each of which amounted to approximately £13-£14 billion.

The administration has committed to not increasing income tax, corporate tax, National Insurance, or VAT.

The Institute for Fiscal Studies (IFS) has indicated that despite the potential implementation of Labour’s proposed £9 billion increase in taxes, striving to achieve a balanced current budget without reducing public service expenditures could leave the budget extremely precarious and heavily reliant on assessments from the Office for Budget Responsibility (OBR).

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The report indicates that the chancellor is taking over a challenging fiscal environment, with tax rates at unprecedented levels and increasing debt, amidst pressures on essential services like prisons, law enforcement, and municipal governments.

Mr. Johnson stated, "This initial budget under the new government may be the most significant since at least 2010… Taxes have reached unprecedented levels, and she faces strict limitations due to her commitments not to hike the primary rates of income tax or corporate tax, nor to raise National Insurance or VAT whatsoever."

The inclination might then be to increase borrowing, potentially by altering the definition of debt that the fiscal regulations focus on. However, considering her commitment to balancing the operating budget, this would not provide extra funds for routine expenditures.

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