Chancellor Rachel Reeves Urged to Raise Income Tax in Autumn Budget

The National Institute of Economic and Social Research (NIESR) has indicated that the UK government may need to increase the basic rate of income tax by at least 2 pence in the upcoming Autumn Budget, scheduled for November 26, 2023. This recommendation is part of a broader analysis aimed at addressing a substantial £50 billion deficit in the nation’s public finances.

NIESR’s report highlights that Chancellor Rachel Reeves is projected to fall short of her fiscal targets by £38.2 billion in the financial year 2029-30. The think tank argues that in order to secure the UK’s economic stability, Reeves will likely need to reconsider her commitment to avoid raising income tax and instead implement significant tax increases.

Potential Tax Changes to Address Financial Shortfalls

According to NIESR, a 2p increase on the current 20% basic rate of income tax could generate approximately £20 billion in additional revenue. Furthermore, a proposed 5p hike to the 40% higher rate might yield an extra £10 billion, while a similar adjustment to the upper tax band could add another £500 million.

Stephen Millard, Deputy Director for Macroeconomics at NIESR, emphasized the need for Reeves to make “brave choices.” He stated, “She will likely need to break her manifesto pledge by raising income tax – rather than attempting to fill the gap by making numerous marginal tax changes, as this would be the least damaging option for the economy.”

The report suggests that a combination of tax increases and spending cuts is necessary to restore the UK economy and public finances to a sustainable position. This course of action is deemed essential for the government to concentrate on promoting higher economic growth and improved living standards across the country.

Political Will Required for Economic Reform

David Aikman, a director at NIESR, reinforced the urgency of taking decisive action. He remarked, “The economics are clear; what is required now is political will – the readiness to take difficult decisions on tax and spending in this Budget in the long-term interests of the UK economy.”

As the Chancellor prepares for the crucial Autumn Budget, the recommendations from NIESR underline the significant challenges facing the government in balancing public finances while adhering to fiscal commitments. The outcome of this budget could have lasting implications for the UK’s economic landscape.