Despairing economists warn Reeves’s income tax U-turn will make system ‘too complicated’ – and will wipe out buffer zone
Rachel Reeves’ former chief adviser has warned, along with leading economists, that a decision to abandon income tax rises and pursue smaller interventions in the upcoming Budget would “overcomplicate” the system.
The chancellor was expected to increase income tax in his financial plans later this month to plug a significant gap in public finances. But Finance Times He stated that he was “shattering” his previous proposals and would look for different ways to close the fiscal deficit.
But economists have warned that the Chancellor cannot create the buffer zone he wants to protect Britain against further global shocks by relying on introducing “inefficient” new taxes.
The statement, made late on Thursday night, was taken as a sign that those in Downing Street were panicking after another week of damaging headlines after the health secretary, Wes Streeting, attempted to tip off information that he was planning a coup.
Former Treasury secretary and Goldman Sachs boss Jim O’Neill, appointed by the Chancellor as opposition economic adviser, described the developments as “disturbing”.
He said: “I’m surprised. If it means they don’t pay the accumulated margins, taxes that are likely to hurt growth, that will be frustrating.”
The decision not to increase income tax means that a shopping cart of smaller interventions is now back on the table.
This includes gambling tax, bank tax, various wealth taxes and mansion tax on properties valued at £2 million and above.
Stephen Millard, deputy director of the National Institute for Economic and Social Research (NIESR), warned: “There are two dangers here: First, by resorting to smaller changes to a large number of marginal taxes, the chancellor risks making the overall tax system even more complex and inefficient (in the sense of creating further distortions in the economy).
“Secondly, it will make it harder for the Chancellor to build a big buffer against his fiscal rules. As we saw last year, having a small buffer creates uncertainty and endless speculation about further tax hikes, as it would only take a small downgrade to the UK’s growth prospects for the buffer to be erased.”
Isaac Delestre, senior tax analyst at the Institute for Fiscal Studies (IFS), said: “We obviously don’t know how much he plans to raise, but if he wants to raise large sums from smaller taxes the risk of doing something unnecessarily economically damaging increases.”
He suggested: “Another obvious option that could raise a lot of money is to look at income tax thresholds (the Labor manifesto’s commitment on BT, NICs and VAT only mentions income tax rates). Although it’s worth noting that in real terms the thresholds have already fallen so much since 2021 because they’re frozen in real terms.”
But Bloomberg reported that Ms Reeves had received an improved fiscal forecast from the budget watchdog, which put the fiscal deficit at £20 billion, people with knowledge of the matter said, prompting her to abandon plans to raise income tax rates.
A £20bn black hole is a tall order, but much less than the £30bn to £40bn previously estimated.
Ruth Curtice, chair of the Resolution Foundation think tank, warned the government of the amount of public wrangling ahead of the Budget.
“It is normal for economic forecasts and policies to change as we approach the budget. It is not normal for many of these to be made public,” he said.
“The market has been moving this morning and shows that there needs to be a serious look at the approach to market-sensitive forecast information in recent weeks.”
The Chancellor appeared to be laying the groundwork for raising income tax in a bid to fill the gap in public finances, warning earlier this week that complying with the manifesto would signal “deep cuts” to public investment.
But Finance Times He stated that he had now abandoned these plans for fear that they might anger both voters and Labor Party MPs.
A Labor MP said: Independent: “I don’t think they have any idea.”
“They make even good news seem bad.”
It is also understood that Chief of Staff Morgan McSweeney and welfare minister Pat McFadden’s warnings against breaking Labor’s manifesto commitment not to increase income tax, national insurance and VAT also won the debate.
Culture secretary Lisa Nandy said on Friday morning ministers were working to “deliver the fairest elections possible”.
Speaking to Times Radio, he described Budgets as “the subject of a lot of work and careful consideration and, in our case, as a government, making the fairest choices possible so that we can help the economy grow and at the same time alleviate people’s suffering over the last fifteen years.”
The decision on income tax is said to be passed to the Office for Budget Responsibility (OBR) on Wednesday, when the Chancellor presents a list of “key measures” to be included in his Budget on 26 November. F.T..
An income tax increase would help plug a fiscal black hole estimated by some economists to be as much as £50bn, but would also break Labour’s clear manifesto commitment not to increase income tax, national insurance or VAT.
