Rachel Reeves look set to raid your pay packet as ‘only safe option’ | Politics | News

Raising income tax would be the “least damaging” option for Chancellor Rachel Reeves, while raising VAT could push people’s real incomes even lower, according to new economic analysis. The government is under pressure to raise revenues and balance the books ahead of the November autumn budget announcement.

Analysis carried out by the National Institute for Economic and Social Research (NIESR) suggests it would be detrimental if the Chancellor found other ways to raise tax revenue beyond “core” taxes in the UK. The economic think tank analyzed the economic impact of increasing income tax, corporate tax and value added tax (VAT).

Of the three, NIESR said increasing VAT would have the biggest negative impact on the UK economy, reducing real personal disposable income (RPDI) by around 3% and real gross domestic product (GDP) by around 1% in the first year of the tax.

A higher VAT rate will increase inflation more than other levers due to the impact it will have on prices in stores. According to the analysis, increasing the corporate tax on profits made by businesses will have a smaller impact in the short term, but will negatively affect the economy by reducing investments in the long term.

Increasing income tax, on the other hand, would have the lowest impact, reducing GDP by about 0.05% in the first year after the tax is implemented. The scenarios in NIESR’s analysis are based on the assumption that the Government aims to increase total net annual income by £30 billion by 2029-30.

That’s the amount Ms. Reeves needs to raise to fill the predicted black hole in the public finances. The “least worst” option for the Chancellor is therefore to increase income tax in his next Budget, NIESR said.

The think tank acknowledged this would mean the Labor Government breaking its manifesto commitment not to increase taxes on “working people”; He said this was now widely interpreted to mean income tax, VAT, employees’ national insurance contributions and corporation tax.

“We argue that they could find other ways to raise tax revenue, but doing so would be far more disruptive and would harm the economy in the long run,” the report’s authors wrote. Ed Cornforth, NIESR economist and main author of the analysis, said: “Our analysis clearly shows that an increase in income tax is the Chancellor’s least damaging, safest option to put the economy on a sustainable, secure footing.

“VAT, an undesirable option given current inflation expectations, would put pressure on prices, and additional business taxes would damage investment incentives at a time when employer NICs are already weakening business confidence. Although politically unpalatable, refraining from increasing income tax would force the Chancellor’s hand into worse options – extreme fixes will not shift the dial.”