Up to £25 billion in tax rises may be needed for 'no return to austerity' pledge

Economists at the Institute for Fiscal Studies estimate the Chancellor may need to raise up to twenty five Billion pounds from tax increases to avoid a return to austerity, Joel Hills reports

“There will be no return to austerity”.It was one of Labour’s keys manifesto pledges, designed to secure power.It’s still not at all clear what the party meant by this commitment but, broadly speaking, it was a signal that Labour could be relied on to protect spending on public services if it won the election.The Institute for Fiscal Studies (IFS) says that if Rachel Reeves wishes not only to alleviate the pressure on schools, hospitals, prisons, courts and local authorities but also to improve the services they offer, then she may need to raise up to £25 billion a year from tax increases in her Budget on October 30.In the last few weeks, the chancellor has spoken often about the need to raise investment to lift economic growth and we already know that she plans to change the debt rule she inherited from the Conservatives in order to do this.But the IFS warns doing this will do “almost nothing” to improve funding for public services.This is because there are two types of government spending. Firstly, there is “current spending” - also known as “day-to-day” spending.This is the money the government uses to fund the running costs of public services and the delivery of welfare and benefits. This includes paying the salaries of public workers (nurses, teachers and police); the running costs of schools, hospitals and government departments; the payments of universal credit and the state pension; and interest payments on the nation’s debts.

Secondly, there is “capital spending”. This is the money the government invests, building stuff like roads, railways, schools and hospitals.If Reeves changes her debt rule - that “debt must be falling as a share of national income by the fifth year of the forecast” - she would have more scope to borrow for capital spending.But Labour’s manifesto also contains a pledge that the “day-to-day costs” of providing public services “are met by revenues”.In the IFS’s view, this means she would almost certainly need to turn to tax rises rather than borrowing if she wished to avoid cuts to some departmental budgets.The director of the IFS, Paul Johnson, says the Budget on October 30 could prove to be “the most consequential since at least 2010”.

Analysis by the IFS, based on economic forecasts prepared by Citi, suggest Rachel Reeves would need to raise taxes by around £16 billion a year if she wishes to balance the current budget by 2028/29 and ensure that the budgets of all government departments rise in line with national income.This is in addition to the £9 billion of tax rises set out in Labour’s manifesto - the largest of which comes from a clampdown on tax avoidance and “further closing non-dom loopholes”.That’s a total of £25 billion.Labour’s pledges not to raise income tax and corporation tax or to increase National Insurance or VAT, as well as its promise not to increase taxes “for working people” make it hard for Rachel Reeves to implement a single, simple, large tax increase.In the Commons yesterday, Sir Kier Starmer did not rule out that he was considering increasing the rate of national insurance contributions paid by employers.The IFS points out that were the government to raise taxes by a total of £25 billion in three weeks time, the increase would be larger than those announced by Gordon Brown in his first budget in July 1997 and by George Osborne in October 2010 (both around £13 billion).

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The IFS concedes the chancellor find herself in an “unenviable” position.Taxes are already at an historically high level, and national debt is high and rising and the interest the government pays on that debt has risen sharply. Meanwhile, public services are visibly struggling.Carl Emerson, director of IFS, says the UK used to be a “low-spender” when it came to the provision of public services but that’s no longer the case.“We have developed an appetite to spend like the average economy,” he says, “but we haven’t matched that with a desire to tax like the average economy”.In his view, the option is pretty clear. Either we decide want a bigger state and we pay for it or we decide that the state should so less.A stark choice and not one we saw in Labour’s manifesto.

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