-
Chancellor will likely
fill the gap with broad-based income tax increases and a
'dog's breakfast' of smaller
measures
-
Root cause is spiralling public
spending – not productivity downgrades or economic
shocks
- Tax revenues from multiple small changes are
unreliable compared to simpler increases in income tax or
VAT
New analysis published today by the Institute of Economic Affairs
reveals Chancellor faces a financial hole of up
to £30 billion ahead of Wednesday's Autumn Budget, which she
will probably attempt to fill through broad-based
increases in taxes on income alongside numerous smaller
tax changes.
The briefing
paper, '2025 Budget Briefing: Tax Policy Preview – Options and
Possible Impacts' by Jessop, explains how this gap
has opened up since the March 2025 forecast and
assesses the Chancellor's options for closing
it.
The single
largest component of the £30 billion hole –
approximately £20 billion – reflects a long overdue downgrade to
the OBR's forecasts for productivity growth. However,
the remainder results directly from policy decisions
made by the current government, including abandoning the £5
billion welfare savings package announced in Spring and spending
any favourable economic assumptions rather than banking them to
reduce borrowing.
The Chancellor is expected to extend
the freeze on personal tax thresholds beyond 2028, raising £8-10
billion through the effects of fiscal drag. The
remaining £20 billion would come from what Jessop describes as a
"dog's breakfast" of smaller measures – potentially including
increased Council Tax on higher-value properties, closing Capital
Gains Tax loopholes, new taxes on partnerships (LLPs), levying
National Insurance on rental income, and increased 'sin taxes' on
gambling and sugary drinks.
The analysis warns that revenues from
such a patchwork of smaller tax increases are inherently
unreliable. Behavioural responses mean the actual revenues raised
would be much less dependable than those from simpler increases
in broad-based taxes like income tax or VAT. The taxation of
wealth is particularly difficult because assets are harder to
value than cash payments, while 'sin taxes' that aim to
discourage activities whilst raising revenue from them often end
up doing neither.
More positively, the Chancellor is
likely to increase fiscal headroom to provide a larger buffer
against future shocks, and many tax increases would be
'backloaded' towards the end of the forecast period rather than
taking effect immediately.
Jessop, Economics Fellow at the
Institute of Economic Affairs and author of the briefing,
said:
"This year's Budget is set
to be just as painful as the last. The Chancellor will attempt to
fill a new hole of perhaps £30 billion with broad-based increases
in taxes on income and from a dog's breakfast of many smaller
measures.
"This hole is not entirely of the Chancellor's making. Most
of the shortfall reflects a downgrade to the OBR's projections
for trend productivity growth, which is arguably long overdue.
She will also want to increase the buffer against future shocks
by raising the fiscal headroom above the low levels inherited
from the previous government.
"Nonetheless, this should have been done by curbing the
growth of spending, rather than by increasing the tax burden even
further. Relying on a dog's breakfast of many smaller tax changes
is also more likely to backfire."
ENDS
Notes to Editors
Read the full
publication: '2025 Budget Briefing: Tax Policy Preview – Options and
Possible Impacts' by Jessop
