During a session with MPs, it was advised that Rachel Reeves should steer clear of implementing multiple tax increases, likened to picking from a “Scrabble bag,” as a solution to the current fiscal challenges.
Experts speaking at the Treasury Committee suggested that the Chancellor might need to raise significant taxes in the upcoming Budget to address the financial shortfall in the public coffers.
Reeves is facing the daunting task of balancing the budget after Government reversals on cuts to winter fuel and disability benefits, alongside dealing with slow economic growth, escalating borrowing costs, and persistent inflation.
Recent indications from Reeves hint at the possibility of tax hikes, as she refrained from reiterating her previous assurance not to seek additional taxes. Last year, she raised taxes by over £40 billion to bolster public services.
Although Labour’s manifesto vows to shield working individuals from increases in National Insurance, VAT, and income tax, Reeves is confronted with a challenging dilemma between raising taxes and implementing spending cuts while adhering to stringent rules against borrowing for daily expenses.
Tax expert Dan Neidle outlined two potential approaches for Reeves to increase taxes, suggesting that expanding the VAT base might be a strategic move, even if it risks breaching manifesto promises. Conversely, he warned against resorting to a multitude of minor tax rises, emphasizing the adverse impact of such a fragmented approach.
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Neidle criticized the current tax system for accumulating inconsistencies and political compromises over the past three decades, emphasizing the need for a more growth-oriented approach to taxation.
Ruth Curtice, Chief Executive of the Resolution Foundation, advocated for tax increases in the upcoming Budget, citing the relatively high borrowing costs for the UK compared to other developed nations as a compelling argument for such measures.
She highlighted the importance of considering the distribution of tax burdens, especially in the aftermath of recent cost-of-living challenges, to ensure a fair and equitable approach.
The Resolution Foundation and the Institute for Fiscal Studies have proposed various tax adjustments, including reductions in employee national insurance and potential increases in capital gains tax, as alternatives to major tax hikes.
Reeves acknowledged the pressing issue of high inflation affecting ordinary citizens during a Cabinet meeting and emphasized the Government’s commitment to controlling inflation, managing public expenditure, and prioritizing economic growth.
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