The UK is in a fiscal bind and it is likely that the Chancellor
will return with another tax-raising Budget on 26 November. One
much-asked question is whether will be able to raise large
sums without breaking Labour's high-profile manifesto promise not
to ‘increase National Insurance, the basic, higher, or additional
rates of Income Tax, or VAT'.
New analysis by IFS researchers, published today as part of the
IFS Green Budget 2025, funded by the Nuffield
Foundation and produced in association with Barclays, concludes
that:
- It would be possible for the Chancellor to raise tens of
billions of pounds a year more in revenue without breaking the
letter of Labour's manifesto promise not to increase the ‘big
three' taxes. But doing so would not be straightforward – not
least because of serious constraints on the next four biggest
taxes (corporation tax, council tax, business rates and fuel
duties). Some other tax-raising options
would be especially economically harmful. A Budget
focused purely on the politics could prove considerably worse on
the economics.
- In particular, if Ms Reeves is considering increasing taxes
on returns to capital – such as rental income, dividend income,
interest income, self-employment profits or capital gains –
simply raising tax rates without reform would do more
economic damage than is necessary. Proper reform would
reduce the disincentive effects that these taxes currently have
on investment and therefore the unnecessary drag that they have
on growth.
-
Tax reform would be a worthy goal at any Budget, but is
especially valuable if the Chancellor wishes to raise more
revenue, as it would help lighten the burden of higher
taxes. This is an opportunity for Ms Reeves. There are plenty
of steps the government could take towards a tax system that is
fairer, simpler, and less damaging to growth.
Isaac Delestre, a Senior Research Economist at IFS and an
author of the chapter, said:
‘Revenue-raising seems likely to be a major goal of the coming
Budget. But if limits her ambition to
collecting more revenue, she will have fallen short. Almost any
package of tax rises is likely to weigh on growth, but by
tackling some of the inefficiency and unfairness in our existing
tax system, the Chancellor could limit the economic damage. The
last thing we need in November is directionless tinkering and
half-baked fixes. There is an opportunity here. The Chancellor
should use this Budget to take real steps down the road towards a
more rational tax system that is better geared to promoting the
prosperity and well-being of taxpayers.'
Helen Miller, Director of IFS and an author of the
chapter, said:
‘What will make this Budget important is the choice not only over
how much tax to raise, but over how to raise it. There is an
opportunity to be bold and take steps towards a system that does
less to impede growth and works better for us all. Muddling
through by simply raising rates of current taxes might appear the
easier option – Rachel Reeves's predecessors in the Treasury have
all too often shied away from taking bold steps to improve the
tax system. But relying on badly designed taxes to bring in
additional revenue will bring unnecessary economic damage.'
Mark Franks, Director of Welfare at the Nuffield
Foundation, said:
‘The government needs to identify additional revenue sources to
deliver its plans for stabilising public services, which remain
under intense strain. However, with many straightforward options
already ruled out, there is a risk of resorting to tax measures
that further complicate the system and create the wrong
incentives. Whilst such steps might achieve short-term fiscal
gains, they should be avoided if they undermine economic growth
and people's well-being and financial security in the longer
term.'
The chapter surveys a broad range of tax-raising options,
setting out the trade-offs and costings and highlighting
opportunities for reform. Additional findings include:
- Raising the rates of income tax, National Insurance
contributions (NICs) or VAT – the three biggest taxes – would
straightforwardly raise large sums but explicitly break Labour's
manifesto commitments. Extending the ongoing freeze to
personal tax thresholds would raise a significant amount but, if
it included a freeze to NICs thresholds, would also break the
manifesto pledge and would leave the real-terms level of
thresholds – and the size of the tax rise – to be determined by
the vagaries of inflation.
-
We caution against introducing an annual wealth
tax. Introducing a new recurrent tax on stocks of
wealth would face huge practical challenges. It would also
penalise saving and, the more it was concentrated on the very
wealthy, the more it would incentivise them to leave (or not
come to) the UK. It would not be a well-targeted way to tax the
large returns that wealth can generate and, as such, would be
no substitute for well-functioning taxes on capital income and
gains. If the Chancellor wants to raise more from the
better-off, a better approach would be to fix existing
wealth-related taxes, including capital gains tax.
-
Property taxation is an area in desperate need of
reform. Revenue-raising within the existing system is
possible, for example by increasing council tax across the
board or for high-band properties – though this extra revenue
would accrue to local authorities, rather than the exchequer,
in the first instance. It would be much better to raise
any additional revenue from a reformed system.
A good end goal would be a reformed council tax (or a
new recurrent property tax) that was proportional to up-to-date
property values in place of the current council tax
(which in England is still ludicrously based on property values
as of 1991) and stamp duty land tax on housing
(which discourages relocation and upsizing/downsizing,
and drags on growth).
- A new tax on income, hypothecated to a particular spending
stream, may be a politically attractive way to sidestep some
specific manifesto commitments and increase taxes on a large tax
base. But introducing a new tax would add needless
complexity to the system, and any hypothecation would
either be unjustifiably restrictive (such that spending on a
particular item was genuinely tied to a specific revenue stream)
or economically meaningless (in the sense that the amount raised
from the tax bore no relation to the amount spent on an area).
The government could explain why it is raising taxes
without the need for a new, hypothecated tax.
-
Restricting income tax relief for pension contributions
would raise large sums but should be avoided. It would
be unfair and distortionary to restrict up-front relief but
continue to tax pension income at the taxpayer's marginal rate.
It would also be practically extremely difficult to attribute
employer contributions to defined benefit arrangements to
specific individuals so that they could be taxed. There are
better options for increasing tax on pensions, including
levying some NICs on employer pension contributions and/or
reforming the 25% tax-free element.
Other tax options are available, and many are discussed in the
chapter.
ENDS
Notes to Editor
A summary of
various policy costings (i.e. the amount various measures would
raise in 2029–30) is included in the conclusion of the chapter,
at the link below.
Options for tax increases is an IFS Green
Budget 2025 chapter by Stuart Adam, Isaac Delestre
and Helen Miller.
This pre-released chapter forms part of the
forthcoming IFS Green Budget 2025: Full report,
funded by the Nuffield Foundation and produced in association
with Barclays. The full report will be published
on Thursday 16 October.
