Rachel Reeves has been warned by some of the country’s leading experts that she has no choice but to raise major taxes and reform others in the upcoming Budget if she is to turn Britain’s “desperate” economic situation around.
The chancellor is facing a black hole of up to £50bn and is widely expected to hike levies next month, but she has been warned she cannot afford to tinker at the margins “by picking from a Scrabble bag” of smaller tax increases.
Leading tax expert Dan Neidle, the founder of Tax Policy Associates, said the “wise” way for Ms Reeves to increase taxes would be “raising one of the main taxes, possibly by expanding the base of VAT, which may or may not break a manifesto pledge”.
He warned that the “less wise way to do it is by picking from a Scrabble bag of lots of little tax rises”.
Economists have repeatedly warned Ms Reeves in recent months that a combination of Labour U-turns, higher borrowing and sluggish economic growth means she must raise taxes or tear up her flagship borrowing rules.
But last month, she suffered another blow after the official Budget watchdog looked to downgrade a key economic performance indicator – a move that could also drive tax hikes.
Mr Neidle also called for reform to the tax system to make it more pro-growth, warning the situation had become “quite desperate”, as he gave evidence to the Commons Treasury committee.
He pointed to a cliff edge of £90,000 at which small businesses pay VAT, which he warned was preventing many from expanding because they would be hit with an immediate penalty if they grew and made more money.
Helen Miller, the director of the highly-respected Institute for Fiscal Studies (IFS), also told MPs on the committee “you could raise £20-30bn without touching those big taxes. The question is not could you, but should you?”
She added that there was a “huge opportunity” for Ms Reeves to reform taxes to ensure they are doing “less damage to economic growth”.
Ruth Curtice, from the Resolution Foundation think tank, also told the committee that “looking at things in the round, she should raise taxes at this Budget. When you look at the cost of borrowing for the UK relative to other countries, it’s one of the highest of rich countries [so] there is a strong case for raising taxes at this budget.”
In its manifesto, Labour ruled out raising income tax, national insurance or VAT. But at Labour’s annual conference last month, Darren Jones, the chief secretary to the PM, appeared to suggest that could change, saying: “The manifesto stands today because decisions haven’t been taken yet.”
The call came just hours after Ms Reeves received more dire economic news that unemployment has hit its highest level for more than four years.
The jobless rate increased unexpectedly to 4.8 per cent in the three months to August, up from 4.7 per cent in the previous three months, the Office for National Statistics said. This is the highest rate since March to January 2021, at the height of the pandemic.
Commenting on the rising employment rate, shadow business secretary Andrew Griffith said: “Rising unemployment is a disaster for the economy and a tragedy for affected families. The growing crisis of young people not being able to find work is a prime example of Labour taking our country in the wrong direction.
“It beggars belief that the government are making things worse with their ‘back to the seventies’ employment legislation, which every single business group opposes.”
