Keir Starmer, the leader of the Labour Party, has made a promise to end austerity and rebuild public services. However, a leading think tank, the Institute for Fiscal Studies, has stated that achieving this goal would require a tax increase of £25 billion annually in the upcoming budget. Even if debt rules are adjusted to allow for more investment spending, tax hikes would still be necessary.
The IFS has highlighted the challenge that Rachel Reeves, the chancellor, would face in finding £25 billion in tax increases. This is because Labour’s election manifesto ruled out raising income tax, employees’ national insurance contributions, and VAT. Reeves has been urged to consider potential tax increases, as outlined in the Labour Party’s manifesto, to meet the goal of covering day-to-day spending with tax receipts.
During a recent Prime Minister’s Questions session, Starmer faced pressure from the opposition leader, Rishi Sunak, to rule out an increase in employer National Insurance Contributions (NICs). Despite this, Starmer refused to make any commitments, emphasizing the importance of not burdening working people with additional taxes.
The IFS has cautioned that if Reeves wishes to align spending on public services with national income, she would need to raise an additional £16 billion in taxes on top of the £9 billion already proposed in Labour’s manifesto. This would be a substantial challenge, considering the party’s pledge not to raise major tax rates or increase national insurance or VAT.
Looking ahead, the IFS has warned that future budgets may become even more challenging due to factors such as an ageing population and declining revenue from fuel duty and tobacco sales. The Office for Budget Responsibility predicts that tax as a share of national income is set to reach its highest level in decades, further highlighting the need for careful financial planning.
There is speculation that Reeves may consider changing debt rules to allow for increased spending on infrastructure projects. However, any significant increase in investment spending would need to be gradual to avoid unsettling the gilt market and triggering a potential buyers’ strike.
In conclusion, the upcoming budget will be a critical moment for the new administration as they navigate the challenges of increasing investment spending while maintaining fiscal stability. Tough decisions will need to be made regarding tax increases and borrowing to fund public services effectively. The choices made in this budget could have far-reaching implications for the country’s financial future.