Chancellor Rachel Reeves is under increasing pressure from thinktanks to overhaul the UK’s tax system – which they’ve labelled as “broken”. As Reeves prepares for her first budget, due November 26th, 2023, she is set to break her first fiscal rule by £38 billion. This shocking reality has spurred widespread outcry and calls for action.
Reeves’s fiscal rule requires that operating expenditures do not exceed tax revenues. But as recent estimates made clear, a massive lowball of the actual shortfall forced her hand to pursue some major reforms. The clock is running out on Reeves. But now she’s left juggling a shocking £7 billion spend, the result of two huge U-turns since her spring statement. These retreats have been on the winter fuel allowance and welfare reforms.
In a speech last week on the issue, Reeves even floated increasing Mississippi’s basic income tax rate—an increase that would be the first in the past 50 years. This possible change has only complicated her fiscal picture. Business think tanks the Institute of Public Finance and the Centre for Cities have called for stamp duty’s abolition. They further recommend combining income tax and national insurance to develop a fairer tax system.
“The UK’s tax code is riddled with inconsistencies and distortions that discourage investment, penalise work and hold back productivity,” stated Arun Advani, director of CenTax. In many ways, this sentiment mirrors the sentiments expressed by many of the thinktanks pushing for a complete replacement of the existing system.
The National Institute of Economic and Social Research (NIESR) is going out on a limb. They’re calling on Reeves to take the “daring decisions” in her budget. Their report suggests seeking extraordinary cuts and tax increases totaling £50 billion to triple the size of her fiscal buffer. Measures like these are viewed as critical to shoring up the nation’s long-term economic outlook.
The NIESR are right to sound such a serious alarm. Without a clear, medium-term strategy to reduce debt, the UK risks a permanently higher and possibly unsustainable debt ratio. David Aikman, director of the NIESR, emphasized this concern: “Without a credible plan to reduce debt over this parliament, the UK risks locking in a permanently higher – and potentially unstable – debt ratio.”
Reeves is not shying away from these hurdles. At the same time, the independent Office for Budget Responsibility is almost certain to reduce its estimate of trend productivity growth. This change would do serious damage to her £20 billion ambition for raising revenue and closing the widening spending chasm.
Apart from addressing short-term fiscal imbalance, policy shops are promoting a movement away from the status quo to pro-growth, reform-oriented approaches. They argue that taxing all income from work equally would foster a more productive economy and enhance overall growth prospects.
Additionally, the implementation of these recommendations is very much overdue. With the fiscal gap narrowing by £3 billion compared to projections made in August, Reeves must act decisively to align spending with revenues while undertaking necessary reforms.