Chancellor may need to raise taxes by £25bn, IFS warns

Published

3 months ago

October 10, 2024

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The chancellor will need to raise taxes by £25bn if she wants to keep spending rising with national income, according to the Institute for Fiscal Studies (IFS).

In its annual ‘Green Budget’ analysis, the IFS warned that the government would have to dramatically increase the £9bn of tax rises outlined in its manifesto to meet the pressures on public services.

The chancellor is likely to stick to her fiscal rule, which requires day-to-day spending to be met by tax revenues. This means she cannot increase borrowing to fill the gap.

Rachel Reeves will present her first budget in the Commons on 30 October. Paul Johnson, director of the IFS, said this budget could be “the most consequential since at least 2010”.

The new Labour government has already pledged in its manifesto to increase government budgets by £5bn and is spending £9bn to settle public sector pay disputes.

If Labour makes no further changes to the spending envelope, which was outlined by the previous government in 2021, it would register a surplus of £17bn.

However, those spending plans are considered wildly unrealistic and would involve real term cuts to unprotected budgets.

There is very little appetite for further cuts to public spending, so the chancellor could protect those budgets from inflation. That would leave her with a surplus of £1bn.

However, if she opted to protect spending as a share of national income – which better reflects population increase – she would record a deficit of £16bn.

That combined with the £9bn of tax rises already promised would see taxes increase by £25bn, further adding to a tax burden which is at a generational high.

Over-zealous borrowing plans could risk a UK buyer’s strike

The UK risks a buyer’s strike in the bond markets if the chancellor is over-zealous with her borrowing plans.

Rachel Reeves is expected to outline plans to increase borrowing for investment purposes in her Budget on 30 October.

Although she has a debt rule that requires debt to be falling as a share of GDP in five years time, she could change her definition of debt to give herself extra headroom.

In doing so, she could find up to £50bn in additional headroom. However, the IFS warned the government against borrowing this much money.

Economists said the chancellor should be slow and steady with any increases in borrowing, with full oversight of institutions such as the National Audit Office.

They note that the UK has greater liquidity risk than its neighbours, including the EU so it was more exposed to changes in investor sentiment.

It would be bigger than the net tax rises recorded in July 1997 and October 2010, which were both around £13-£14bn.

The government has also penned itself in by promising not to raise income tax and corporation tax or to increase National Insurance or VAT.

The IFS said that, even if Labour’s planned £9bn tax rise is implemented, trying to balance the current budget while avoiding cuts to public service spending would put the budget “on a knife edge” and highly sensitive to OBR judgments.

It said the chancellor has inherited an “unenviable” public finance situation as taxes are already at a historic high and debt is rising, while public services such as prisons, police and local councils are under strain.

Mr Johnson, said: “The first budget of this new administration could be the most consequential since at least 2010… Taxes are at an all-time high, and she is tightly constrained by her pledges not to raise the main rates of income tax or corporation tax, or to increase National Insurance or VAT at all.

“The temptation then is to borrow more, perhaps changing the definition of debt targeted by the fiscal rules. But, given her pledge to balance the current budget, that would not free up additional resource for day-to-day spending.”

Politics

Kemi Badenoch calls for ‘long overdue’ national inquiry into UK grooming scandal

Published

59 mins ago

January 2, 2025

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Kemi Badenoch calls for 'long overdue' national inquiry into UK grooming scandal

Kemi Badenoch has called for a national inquiry into the grooming scandal that took place across UK towns and cities, arguing one was “long overdue”.

The Tory leader said 2025 “must be the year that victims get justice” after it emerged that Jess Phillips, the safeguarding minister, had rejected calls from Oldham council for a public inquiry into child exploitation in the town.

In a post on X, the Tory leader wrote: “The time is long overdue for a full national inquiry into the rape gangs scandal.

“Trials have taken place all over the country in recent years but no one in authority has joined the dots. 2025 must be the year that the victims start to get justice.”

Ms Badenoch was joined in her calls by shadow safeguarding minister Alicia Kearns, who has written to Ms Phillips asking her to reverse the government’s decision regarding Oldham.

“We have asked for planned Conservative measures to be enacted, to reverse the Oldham refusal, and for a statutory inquiry into grooming and rape gangs,” she wrote.

Girls as young as 11 were groomed and raped across a number of towns in England – including Oldham, Rochdale, Rotherham and Telford – over a decade ago in a national scandal that was exposed in 2013.

The following year a report by Prof Alexis Jay revealed the scale of exploitation in Rotherham between 1997 and 2013 – where around 1,400 girls were abused – and the failure of police and social services to intervene.

It was followed by the statutory Independent Inquiry into Child Sexual Abuse (IICSA), also chaired by Prof Jay, who found in her final report published in 2022 that children were still being sexually exploited by networks in all parts of England and Wales in the “most degrading and destructive ways”.

The final report recommended that institutions that work with children should be required by law to report suspicions of child sexual abuse.

In a letter to Oldham Council dated October last year, Ms Phillips, the Labour MP for Birmingham Yardley, said that while she recognised the “strength of feeling” over the matter, she believed it was for “Oldham Council alone to decide to commission an inquiry into child sexual exploitation locally, rather than for the government to intervene”.

She added: “I welcome the council’s resolution to do so, as set out in your letter, and to continue its important work with victims and survivors.

“Should the council choose to proceed, I would look forward to the inquiry’s findings and ensuring that any lessons that can be learnt to improve the frontline response are adopted at a local and, where applicable, at a national level.”

Ms Phillips has been criticised for her response by Conservative politicians, including former home secretary Suella Braverman, who accused the minister of “letting down victims”.

However, Ms Badenoch faced criticism on social media by Sammy Woodhouse, a survivor of sexual abuse in Rotherham, who said: “I’ve met with your party for 12 years about this when you were in power. I asked for an inquiry into every town and city, none of you cared. Now you need the vote you want to speak on it?”

And Reform UK leader Nigel Farage said: “Talk is cheap. The Conservatives had 14 years in government to launch an inquiry.

“The establishment has failed the victims of grooming gangs on every level.”

An Oldham Council spokesman said: “Survivors sit at the heart of our work to end child sexual exploitation.

“Whatever happens in terms of future inquiries, we have promised them that their wishes will be paramount, and we will not renege on that pledge.”

A Labour spokesperson said: “Child sexual abuse and exploitation are the most horrendous crimes and the Home Office supports police investigations and independent inquiries to get truth and justice for victims.

“We have supported both the national overarching inquiry into child abuse which reported in 2022, and local independent inquiries and reviews including in Telford, Rotherham and Greater Manchester.

“This government is working urgently to strengthen the law so that these crimes are properly reported and investigated.”