Rachel Reeves should cut national insurance and increase income tax to create a “level playing field” and protect workers’ pay, a think tank has said.
In a report published on Tuesday, the Resolution Foundation said the Chancellor should send a “decisive signal” that she will take “tough decisions” on tax to calm jittery bond markets.
It comes as Ms Reeves prepares to deliver a Budget in November that is widely expected to see significant tax rises as she battles to meet her fiscal rules.
Among the tax changes proposed by the Resolution Foundation was a 2p cut in national insurance, matched by a 2p rise in income tax.
The think tank argued that the switch would raise £6 billion and help tackle “unfairness” in the tax system, as income tax is paid by more people including pensioners and landlords.
But the change would provide only some of the £20 billion of tax rises the think tank estimated would be needed by 2029/30 thanks to a combination of increased borrowing costs, lacklustre growth and new spending commitments.
Adam Corlett, principal economist at the Resolution Foundation, said cutting national insurance and increasing income tax “should form part of wider efforts to level the playing field on tax”.
Other proposals put forward by the think tank include increasing the tax on dividends, addressing a “worrying” growth in unpaid corporation tax from small businesses, applying a carbon charge to long-haul flights and shipping, and expanding taxation of sugar and salt.
It also proposed gradually reducing the threshold at which businesses pay VAT from £90,000 to £30,000, saying this would help “promote fair competition” and raise £2 billion a year by 2029/30.
Mr Corlett said: “Policy U-turns, higher borrowing costs and lower productivity growth mean that the Chancellor will need to act to avoid borrowing costs rising even further this autumn.
“Significant tax rises will be needed for the Chancellor to send a clear signal that the UK’s public finances are under control.
“Any tax rises are likely to be painful but given the fallout from the recent employer NI rise, the Chancellor should do all she can to avoid loading further pain onto workers’ pay packets.”
The Government has repeatedly insisted that it will keep its manifesto promise not to raise income tax, national insurance or VAT.
But the Chancellor will face a difficult balancing act when she delivers her Budget on November 26 in trying to meet that pledge while also sticking to the rules she has set herself on borrowing.
While the Resolution Foundation estimated Ms Reeves would need to raise taxes by £20 billion, others have suggested the figure could be as high as £51 billion.
A Treasury spokesperson said: “The Chancellor makes tax policy decisions at fiscal events. We do not comment on speculation around future changes to tax policy.”
