MNI: Keeping UK Manifesto Promises Tough, Not Impossible - IFS

Restoring the UK’s fiscal headroom will be “difficult, but not impossible” without breaking Labour’s manifesto pledges not to raise VAT, National Insurance, or income tax in the Nov 26 budget, the Institute for Fiscal Studies said in a report published on Monday.

Reversals to planned benefit cuts this summer and a possible downgrade to the Office for Budget Responsibility’s productivity forecast could “easily eliminate” the GBP10 billion headroom Chancellor of the Exchequer Rachel Reeves left herself in March, the IFS said in its “Green Budget.”

But capping income tax relief on pension contributions at 20% would allow the government to raise GBP22 billion, the IFS calculate, although this would pose practical challenges for defined-benefit pensions, to which 45% of up-front income tax relief is attributable. (See MNI INTERVIEW: UK Debt Stabilisation Insufficient - NIESR Head)

A freeze to income tax and NICs thresholds until April 2030 would raise GBP10.4 billion, but would break the government’s manifesto pledge, the report said.

Preserving the 5p fuel duty cut would lose the government revenue relative to current forecasts, which assume that fuel duty rates will keep pace with RPI inflation, it said.

 “The UK tax system is in dire need of reform” to create a “fairer, simpler, more growth-friendly tax system,” they say, including reforms to property and capital taxes. “At a minimum, the Chancellor should avoid measures that worsen the design of the tax system.”

Tax revenue will rise to 37.4% of national income in 2026-27. This remains below the level seen in other Western European countries, so the IFS believe further tax rises are bearable. Although direct taxes on middle earners are lower than at any time since the mid-1970s, taxes have been steadily increased since 2010 on individuals at the top of the income distribution, it said.