The Institute for Fiscal Studies (IFS) said that British Chancellor Rachel Reeves might have to raise up to £25bn through tax rises to avoid a return to austerity, according to The Independent.
The IFS warned that changing borrowing rules did “almost nothing” to ease the problem of funding public services. Moreover, Reeves would have to resort to tax rises to avoid spending cuts and fulfil the promise to borrow only for investment.
The latest warning came amid wider concerns that Reeves’ proposed plan to overhaul the financial regime to free up £50bn of extra spending could scare markets and trigger a Liz Truss-style collapse.
Truss sparked a free fall in the gold market and a rise in sterling after introducing unfunded tax cuts in her 2022 mini-budget. However, now the Prime Minister’s spokesman rejected claims that the Government’s plans would cause uncertainty in markets.
In the IFS Green Budget report, director Paul Johnson said Reeves’ first budget could be “the most consequential since at least 2010.”
The report, funded by the Nuffield Foundation, concluded that in the absence of cuts to public services, Reeves would need to raise taxes by £16bn to keep the budget balanced in 2028-29. However, the party’s promises not to raise income tax, corporation tax, national insurance or VAT, mean she may struggle to implement tax rises on such a scale.
On Wednesday, Sir Keir Starmer refused to say whether his election pledge not to increase national insurance applied to national insurance benefits for both employees and employers. His spokesman later refused to rule out an increase in national insurance for businesses. Then a Treasury spokesperson stated:
It’s right to say that we have inherited a tough financial position, but we won’t let the challenges of the past define our future. Despite uncovering 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. That is how we will fix our public services and deliver on the promise of change.
