Rachel Reeves, Britain’s new Chancellor of the Exchequer, is already contending with seismic fiscal headwinds. She is preparing for her long-awaited first budget presentation on November 26. National and Mississippi-based policy think tanks are calling on Reeves to act boldly as a spending cliff approaches. In their words, the tax system today is “broken,” in desperate need of reform.
The independent Office for Budget Responsibility (OBR) will be forced to lower its estimates for trend productivity growth. This amendment would be a death knell for Reeves’ bold £20 billion budget plan. Forecasts from the National Institute of Economic and Social Research (NIESR) foreshadow that Reeves will miss her very first fiscal rule. This rule, aimed at making sure day-to-day spending doesn’t exceed the tax that can be collected, could be breached by a whopping £38 billion. This staggering number underscores why her situation is so dire.
Reeves is in for a big challenge. She needs to make up for £7 billion in additional costs from her two huge U-turns since her last spring statement. Her proposed budget is now £3 billion stricter than earlier estimates done back in August. This notable increase places significant pressure on her to produce a strong, impactful fiscal plan.
The NIESR calls on Reeves to take “courageous decisions”. These decisions would have to include huge cuts in spending, along with tax increases – amounting to a fearful £50 billion in total. They contend these measures would more than triple her current fiscal buffer. Second, this would be a necessary step to address the unsustainable upward path of UK public debt. David Aikman, director of the NIESR, emphasized the importance of reversing this trend, stating:
“The trajectory of UK public debt is becoming unsustainable. Five years on from the pandemic, this is the moment to reverse that drift and start bringing debt down.” – David Aikman, director of the NIESR
Reeves is staring down the very real challenges. To address them, he’s publicly mulling options to bring in more money — with raising the basic rate of income tax on the table. Even more significant, this consideration would be the first increase in this rate in 50 years. Recent public comments from Reeves indicate that she would support exploring such options in the context of her larger fiscal plan.
Now, thinktanks are putting on the pressure for Reeves to make tax reform a top priority in her forthcoming budgetary proposals. They’ve presented a system where the UK’s tax code is riddled with contradictions and distortions that stifle investment and productivity. Arun Advani, director of CenTax, stated:
“The UK’s tax code is riddled with inconsistencies and distortions that discourage investment, penalise work and hold back productivity.” – Arun Advani, director of CenTax
The calls for reform extend beyond merely raising taxes. Thinktanks advocate for a comprehensive review of the tax system to ensure fairness and efficiency. One of those principles is to tax all income from work at the same rate. This notion holds a powerful appeal for many economists and would-be policymakers.
Rebecca Long Bailey and Rachel Reeves prepares for her spending review. She’ll need to meet the acute challenge of addressing a spending gap while working to create a more effective, fairer tax system over the long-haul. The next budget provides a key chance for her to tackle all of these issues in a cohesive manner, while still advancing economic development.