One of Britain’s top economists has urged Rachel Reeves to hike the basic rate of income tax for the first time since 1975 in response to Donald Trump’s global trade war.
Paul Johnson, director of the influential Institute for Fiscal Studies (IFS), has warned the chancellor’s “iron-clad” fiscal rules mean she will face economically damaging choices ahead of her Budget this autumn.
He said Mr Trump’s tariffs are “buffeting the economy so badly” and “there is a good chance she will need more money to meet those rules”.
“It would not be daft to think about doing something that no one has done for the last 50 years, and that is to increase the basic rate of income tax, which is probably less economically damaging than an awful lot of other things she might think about doing,” he told Times Radio.
In her spring statement last month, the stagnant economy and rising borrowing costs left Ms Reeves scrambling to meet her fiscal rules, which dictate that she cannot borrow to fund day-to-day spending, and that debt must be falling as a share of national income by the end of a five-year forecast period.
She slashed the welfare bill by billions, despite warnings the spending cuts would drive hundreds of thousands of additional households into poverty.
But government spending watchdog the Office for Budget Responsibility (OBR) at the time warned Mr Trump’s threatened trade war could hit the economy and wipe out the £9.9bn worth of headroom Ms Reeves had left herself.
And Mr Johnson became the latest economist warning Ms Reeves will almost certainly have to find deep spending cuts or raise taxes when she delivers her next Budget this autumn.
The last chancellor to increase the basic rate of income tax was Labour’s Denis Healey in 1975, with inflation running close to 20 per cent, unemployment rising and the pound falling.
Chancellors have since raised all of what Mr Johnson dubbed “the big taxes”, VAT, national insurance and corporation tax.
He also cited controversial tax threshold freezes, which drag more people into paying higher rates of income tax.
“But the basic rate? For 50 years chancellors have moved heaven and earth first to cut it to its current 20 per cent and then to avoid increasing it,” the IFS boss wrote in The Times.
He warned that other tax changes pursued by Ms Reeves and Sir Keir Starmer since the general election have penalised workers, including the decision to hike employer national insurance contributions last October.
Critics have said the change is a tax on jobs and will slow the economy, limiting the chancellor’s tax income in the long run.
