Rachel Reeves has been warned she faces having to break Labour’s manifesto pledge not to increase taxes on working people after leading economists said “fiddling around” with smaller taxes – like a mansion tax and a gambling levy – would not be enough to fill the black hole in the Budget.
The warning has been led by Lord Jim O’Neill, the economist, former Treasury minister and ex-Goldman Sachs chairman who was brought in by Ms Reeves as a top advisor.
He told The Independent: “I don’t think fiddling around with smaller taxes any longer is likely to yield much fruit.”
Instead, the chancellor has been told by leading think tanks that, if she wants to maintain her spending plans and fiscal rules on borrowing, she will likely have to raise income tax, VAT or employee national insurance – breaking one of Labour’s key manifesto pledges.
Leading economic think tank, the National Institute of Economic and Social Research (NIESR), has estimated that Ms Reeves will be faced with a £41.2bn black hole at her next Budget this autumn.
Senior economists including Prof Jagjit Chadha, who recently stepped down as the head of the NIESR, and Andrew Sentance, a former member of the Bank of England’s rate-setting Monetary Policy Committee, have also suggested the UK may need to go to the International Monetary Fund (IMF) for a bail out.
While the Treasury dismissed the speculation, the options for Ms Reeves to fill the economic gap appear to be dwindling.
During the Spending Review earlier this year she had headroom of just around £10bn, according to the Institute of Fiscal Studies (IFS), but economic problems caused by wars and Donald Trump’s tariffs have left the UK economy vulnerable.
Added to that a rise on the gilt markets meant that long term borrowing was at its highest cost since 1998. 30-year gilts hit 5.64 per cent –much higher than the 4.8 per cent which saw Liz Truss forced from office.
A number of options have been proposed led by a call for a mansion tax – a form of wealth tax targeting expensive properties.
But Professor Stephen Millard, deputy director of NIESR, warned that to tackle the huge gap in public spending Ms Reeves will have to consider the three big taxes – income tax, VAT and national insurance.
He said: “Really given the gap that we think is, she’s got to go back on her manifesto pledge, raise one of the big three taxes. I think that’s the only way she’s going to be able to generate enough money.
“Spending which is permanent needs to be financed by permanent taxation. That’s an issue. If increases in spending are expected to be temporary, they need to be financed through borrowing.”
It is an assessment shared by Isaac Delestre, a tax expert at the IFS.
He said: “If you were looking to raise £40bn, it would be difficult to do that without touching any of the big taxes.”
He noted Ms Reeves has also committed to freezing the fourth biggest tax – corporation tax on businesses – while options like fuel duty are less attractive than they were because it raises less money with the decline in petrol and diesel cars.
He suggested the other option was reducing welfare or spending cuts, but noted the political problems within the Labour Party made that more difficult.
He added: “Reducing spending seems unlikely, given the fact that they’ve just concluded the spending review, so they’re probably not going to reopen that immediately.”
Looking at the recent rebellions against welfare cuts, he noted: “The other option would be to reduce spending, that’s non departmental spending, which comes outside of the spending review, but that’s things like welfare. And so far, some seem to have had a great deal of success in trying to reduce welfare, either on winter fuel payments or on or on disability benefits.”
According to The Times, the mansion tax plan would mean higher-rate taxpayers paying 24 per cent of any gain in the value of their home, while basic rate taxpayers would be hit with an 18 per cent levy.
Dan Neidle, founder of Tax Policy Associates Ltd, who supports the concept of higher valued property owners paying more, has calculated that a new band of properties over £1.5m could raise up to £3.6bn.
This calculation was working on a series of increases which see the new top band go from the current situation where it is double the lowest band A to up to 12 times that level instead for the most expensive properties.
He noted: “Creating a new percentage tax on top of existing council tax, on the other hand, raises more significant amounts. A flat 0.5% annual tax on all property value above £2m raises about £1bn, with owners of £8m+ properties paying an average of £90,000 more tax each year.”
He listed a series of problems including people on low incomes in high valuer properties not being able to pay; the policy suppressing the value of homes; people being disincentivised to improve their homes, landlords passing on the cost to tenants; and the need for regular valuations when council tax bands have not been revalued since 1991.
He said: “The balance changes once we’re looking at wholesale reform: replacing all of council tax, business rates and stamp duty with land value tax. The boost that such a reform would give to growth and homebuilding in my view more than counters the downsides. But bolting on a miniature version of such a tax as a pure revenue-raiser looks less attractive.”
Meanwhile, a landlord national insurance contribution plan has been proposed by the Resolution Foundation thinktank whose former director Torsten Bell is now a Treasury minister.
It could raise £2bn in revenue but again could end up being passed on to tenants or get landlords to sell up in a market which is already under pressure.
The gambling tax championed by former PM Gordon Brown after being drawn up by the Institute for Public Policy Research (IPPR) may raise around £3.2bn extra per year.
Other options include freezing income tax thresholds for a further two years to 2030 which could bring in between £7bn and £9bn over the period.
