Concerns are mounting among economists following Chancellor of the Exchequer Rachel Reeves’s decision to scrap proposed income tax increases in her upcoming Budget. Instead, she plans to introduce a series of smaller tax measures to address a fiscal deficit estimated at £20 billion. This unexpected pivot has been described as potentially complicating the UK’s tax system while undermining efforts to create a financial buffer against future economic shocks.
The Financial Times reported that Reeves has abandoned an earlier strategy that included raising income tax rates, which was intended to fill a gap in public finances. The chancellor’s revised approach, which involves a mix of smaller interventions, reflects a government grappling with political pressures and recent damaging headlines. Notably, there were reports of an attempted coup involving Health Secretary Wes Streeting, adding to the perception of instability within the government.
Former Treasury Minister Lord Jim O’Neill, who served as an economic adviser to Reeves, expressed his disappointment with the recent developments. He stated, “I’m surprised. If it means their defaulting to accumulated fringe, possibly growth damaging taxes again, it will be bothersome.”
The decision to forgo an income tax increase opens the door for a variety of smaller tax measures, including a gambling tax, a bank levy, and a mansion tax targeting properties valued at over £2 million. Stephen Millard, deputy director of the National Institute of Economic and Social Research (NIESR), warned of potential pitfalls. He noted, “By resorting to smaller changes to lots of marginal taxes, the chancellor risks making the overall tax system ever more complicated and inefficient.”
The impact of these smaller tax measures could be detrimental to the UK’s economic landscape. Millard emphasized that a lack of a substantial financial buffer could lead to uncertainty. “As we’ve seen over the past year, having a small buffer creates uncertainty and endless speculation about further tax rises,” he explained.
Concerns regarding the sustainability of this strategy were echoed by Isaac Delestre, a senior tax analyst at the Institute for Fiscal Studies (IFS). He stated, “The risks of doing something unnecessarily economically damaging increase if she is going to look to raise large amounts from smaller taxes.” Delestre highlighted that reviewing income tax thresholds could be a more effective way to generate revenue without alienating voters.
Reports indicate that Reeves received a more favorable fiscal outlook from the Office for Budget Responsibility (OBR), which placed the fiscal shortfall at £20 billion, a significant reduction from earlier estimates of £30 billion to £40 billion. This revised figure may have influenced her decision to abandon plans for raising income tax rates, which could have contradicted Labour’s manifesto pledge not to increase income tax, national insurance, or VAT.
Despite the shift in strategy, some Labour MPs expressed skepticism about the government’s direction. One MP remarked, “I don’t think they have a clue. They’re making even good news look bad.” This sentiment reflects broader concerns within the party regarding the handling of fiscal policy amid public scrutiny.
Culture Secretary Lisa Nandy addressed the situation on Friday, asserting that ministers are focused on making “the fairest possible choices” in the Budget. Speaking to Times Radio, she emphasized the importance of careful consideration in delivering a Budget that supports economic growth while alleviating public hardship.
As the November 26, 2023, Budget date approaches, the implications of Reeves’ decisions on income tax and other fiscal measures will be closely monitored. The stakes are high, as the chancellor navigates a challenging economic landscape while balancing the expectations of both her party and the public.
