Rachel Reeves should avoid ‘half-baked’ tax fixes in Budget, says IFS

Chancellor Rachel Reeves should avoid “directional interventions and half-baked fixes” as she tries to boost the government’s tax revenues in next month’s budget, a leading think tank has said.

Taxes are expected to rise in the budget, with pressure on the chancellor to raise money to meet his own rules on government finances.

But the Institute for Fiscal Studies (IFS), considered one of Britain’s most influential economic voices, said some tax increases could be “particularly economically harmful”.

The Treasury said it was clear that the Chancellor’s Budget would strike the right balance between financing public services and stimulating growth and investment.

Some analysts predict Reeves will have to raise tens of billions of pounds either by increasing taxes or reducing spending to comply with rules he has described as “non-negotiable”.

The two main rules are:

• Not borrowing to finance daily public expenditure by the end of this parliament

• To ensure that the share of state debt in national income decreases by the end of this parliament

Labor had promised not to increase income tax, National Insurance or VAT on employees ahead of the 2024 general election.

The IFS said it may be possible for the Chancellor to raise tens of billions of pounds more a year in revenue without delivering on the promises in this manifesto, but it will not be easy.

He said there were “serious restrictions” on the next four biggest taxes – corporation tax, council tax, business rates and fuel taxes – while “some other tax increase options would be particularly economically damaging”.

The IFS’s comments came with an extract from its annual Green Budget analyzing the challenges facing the chancellor.

The think tank called for broader reform of the tax system that would harmonize “overall tax rates between different forms of income”; This, he says, would be “more equitable and growth-friendly.”

“There is an opportunity to be bold and move towards a system that does less to hinder growth and works better for us all,” said Helen Miller, director of the IFS and one of the report’s authors.

He suggests reforms to the property tax and capital gains tax are “good places to start.”

The report goes on to examine a range of concessions the government could make to raise more revenue.

The bank is warning against a wealth tax, which it says would face “major practical difficulties” that would potentially penalize savings and encourage wealthy people to leave the country.

“If the Chancellor wants to raise more money from the better off, a better approach would be to fix taxes on existing wealth, including capital gains tax.”

Property tax is stated to be “an area in desperate need of reform.” The bill calls for council tax reform based on current property values ​​rather than the current system, which “ridiculously” uses values ​​from 1991.

Extending the current freeze on income tax thresholds, which expires in 2028, could result in a “significant” increase. Speaking to the BBC in September, Rachel Reeves did not rule out this possibility.

IFS recommends restricting income tax deduction for pension contributions It could potentially raise a large sum but should be avoided as it would be “unfair and distorted”.

It was stated that there were “better options” to increase pension tax, such as reforming the tax-free element.

A Treasury spokesman said: “The Chancellor has made clear in the Budget that he will strike the right balance between ensuring we have enough money to fund our public services but also ensuring we can bring growth and investment to businesses.”