Tax Tensions: Can Chancellor Reeves Navigate the Budget Without 'Half-Baked' Solutions?
Chancellor Rachel Reeves is facing pressing challenges as she prepares for an upcoming budget that is expected to raise taxes significantly due to a projected £20bn financial gap. The Institute for Fiscal Studies (IFS) has strongly advised her against ‘directionless tinkering’ and ’half-baked fixes’ to the tax system. The pressure on Reeves is immense, as she adheres to her self-imposed fiscal rules, which include:
Not borrowing for day-to-day spending by the end of the parliament.
2. Reducing government debt as a share of national income by the end of the parliament.
Despite a Labour manifesto commitment not to raise income tax, National Insurance, or VAT for working individuals, the IFS believes Reeves could potentially increase government revenue by tens of billions through strategic adjustments. Key recommendations from the IFS report include:
- Doubling council tax on expensive properties, projected to generate £4bn.
Abolishing relief on inheritance tax for primary homes, which could yield £6bn.
Extending income tax threshold freezes, which could provide substantial revenue.
However, the think tank warns against implementing a wealth tax, citing potential adverse effects on savings and risks of driving affluent individuals abroad. There are also concerns that limiting income tax relief on pensions would be unfair and could distort the market, urging reforms instead to increase taxes on pensions more equitably.
The IFS argues for a broader tax reform that aligns tax rates across different income types, recommending updates to issues like property tax and capital gains tax—considered outdated and regressive.
Highlighting the issues with the current system, IFS director Helen Miller characterized stamp duty as an ‘absolutely awful tax’ and called for a proportional council tax model based on modern property values. As Reeves prepares to present her budget, the goal is to balance public service funding with the necessity of stimulating economic growth—potentially setting the stage for a tense relationship with voters as changes are implemented.