MNI: UK Budget Should Double Headroom - Resolution Foundation

UK Chancellor of the Exchequer Rachel Reeves should double her fiscal headroom to GBP20 billion through GBP26 billion of tax rises in her Nov 26 budget, think tank the Resolution Foundation said on Tuesday.

"A backdrop of volatility in the cost of government borrowing in financial markets ... reinforces the need for the Chancellor not just to fill the fiscal hole, but to take steps to boost confidence," it said in its Autumn Budget preview. (See MNI INTERVIEW: UK Debt Stabilisation Insufficient - NIESR Head)

"Doubling her fiscal headroom to GBP20 billion and allowing for cost-of-living support would require GBP31 billion of fiscal consolidation," it said, adding that this consolidation should largely employ tax rises not spending cuts.

The Foundation said a "tough-to-deliver real-terms freeze" in departmental spending in 2029-2030 would save GBP5 billion. Still, "the scope for spending cuts is limited," as Reeves already set out departmental spending plans through 2028-2029 this summer. 

TAX RISES

"Tax rises of GBP26 billion are therefore likely to be needed, the scale of which means that avoiding touching the three big taxes – VAT, income tax and national insurance (NI) – risks doing more harm than good." (See MNI INTERVIEW: BOE Dec Cut Chances Overestimated - Saunders)

The Labour Party's manifesto ruled out raising any of the three big taxes, leading to speculation the budget will raise a large number of more minor taxes. (See MNI: Keeping UK Manifesto Promises Tough, Not Impossible - IFS)

Above-target inflation means that "now is not the time to raise VAT," the Foundation said.

The Foundation advised that the remaining money should be raised through "sensible reforms," including a 2p rise in income tax which would be offset by a 2p cut in NI, yielding GBP6 billion in revenue, alongside extending NI to partnership income.

"Raising dividend tax and closing Capital Gains Tax loopholes" would yield GBP7 billion, it estimates, alongside supporting a reduction to the VAT threshold (GBP2 billion), reform to Vehicle Excise Duty (GBP2 billion), and an extension to the freeze on tax thresholds beyond 2028 (GBP7.5 billion).

Treasury Minister Torsten Bell was head of the Resolution Foundation from 2015 to 2024.