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Chancellor Rachel Reeves needs to fix the tax system rather than make a “half-baked dash for revenue” if she wants to raise tens of billions of pounds without causing undue damage to the economy, an influential think-tank has said.
The Institute for Fiscal Studies said on Monday that raising significant sums — without breaking Labour’s election manifesto pledges not to increase national insurance, income tax or value added tax — was possible, but not straightforward.
Many of the tax-raising options outside these “big three” taxes would be “particularly damaging” to growth, unless Reeves reformed property and capital taxes to create a fairer, simpler system, the IFS said.
Reform of property taxes — aiming to scrap stamp duty, overhaul council tax and replace business rates with a new tax on the value of non-residential land — should be high on the list of priorities, it added.
“Almost any package of tax rises is likely to weigh on growth, but by tackling some of the inefficiency and unfairness in our existing tax system, the chancellor could limit the economic damage,” Isaac Delestre, senior research economist at the IFS, said.
He added: “The last thing we need in November is directionless tinkering and half-baked fixes.”
The IFS analysis comes as Reeves weighs options for tax increases to fill a fiscal hole estimated at £20bn to £30bn in next month’s Budget.
Bond investors have urged her to build a larger fiscal buffer into the public finances than she did last year, to avoid the need for further tax increases.
The IFS said Reeves could achieve this without touching the “big three” taxes but warned she faced “serious constraints” to raising revenue through other routes.
Extending the existing freeze to personal tax thresholds, and freezing national insurance thresholds, could yield an estimated £10.4bn by 2029-30, but would not be in the spirit of Labour’s manifesto pledges, and the amount raised would be left to “the vagaries of inflation”, the IFS said.
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An annual wealth tax would face “huge practical challenges” and risk driving rich people from the UK.
“If the chancellor wants to raise more from the better-off, a better approach would be to fix existing wealth-related taxes, including capital gains tax,” the think-tank said.
Without reform, higher tax rates on returns to capital — such as rent, dividends, interest, self-employment profits or capital gains — could raise some £3bn to £4bn by 2029-30, but would also deter saving and investment, the IFS estimated.
The think-tank opposes restricting tax relief on pension contributions — a measure others view as a way of raising significant sums — saying it would be practically difficult, as well as unfair.
Instead, it advocates reforms to broaden the VAT base — the UK allows far more exemptions and zero-rated items than other countries — as well as an enforcement drive to make sure small companies pay the tax they owe.
Increasing the rate of VAT from 20 to 21 per cent, in breach of Labour’s manifesto pledges, would raise £9.9bn in 2029-30.
The chancellor could raise £4.2bn by charging VAT at 1 per cent on all zero-rated items, the IFS said.
