More Tax Rises Needed in Future to Avoid £9 Billion in Spending Cuts: IFS

Early morning commuters crossing Waterloo Bridge in London, on Oct. 9, 2014. Anthony Devlin/PA Wire

The government may need to raise more taxes in the course of this Parliament to avoid £9 billion in spending cuts, the Institute for Fiscal Studies (IFS) think tank has said.

On Wednesday, Chancellor of the Exchequer Rachel Reeves delivered Labour’s first Budget in 14 years, announcing £40 billion in extra taxes, bringing tax on a path to 38.2 percent of GDP, which the IFS said was its “highest level ever in the UK.”

Reeves also announced that public spending will increase by around £70 billion annually over the next five years and borrowing will increase by an average of £32.3 billion a year.

In an analysis of the Budget delivered on Thursday, the IFS said that after taking into account inflation and the additional cost to public sector employers of rising national insurance (NI), day-to-day public service spending will rise by 4.3 percent this year, 2.6 percent in 2025, and then drop to only 1.3 percent in 2026 and each subsequent year.

IFS Director Paul Johnson said that keeping within that 1.3 percent envelope “will be extremely challenging” and that day-to-day public service spending “will in fact increase considerably more quickly than supposedly planned after next year.”

Johnson said that it would be odd to increase spending rapidly, only to cut back again, saying that 1.3 percent “would almost certainly mean real-terms cuts for some departments.”

“I’m afraid this looks like the same silly games playing as we got used to with the last lot. Pencil in implausibly low spending increases for the future in order to make the fiscal arithmetic balance,” Johnson said.

The IFS estimates the Treasury would need an extra £9 billion “to avoid cutting unprotected departments after next year.”

Working People Will Pay

One of the tax rises announced was a 1.2 percent increase in employer NI contributions, bringing it up to a total of 15 percent. This meant that Reeves managed to—technically—keep her promise that there would be no change to “working people’s payslips,” with no increase in income tax and employee NI or VAT.

However, the Office for Budget Responsibility (OBR) said that although it may take some time to materialise as wages adjust, the increase in employer NI contributions will have “a persistent negative effect on work incentives and both labour demand and labour supply,” with three-quarters of the impact being felt by employees. The OBR said it could result in lower wages, reducing the amount raised from employer NI and also reducing employee NI and income tax revenues.

The IFS also scrutinised the predicted benefit this tax increase will produce. Johnson said it “will not actually get the Treasury anything like the £25 billion stated on the scorecard.”

Quoting the OBR’s predictions, the IFS said that that would take the net revenue down to around £16 billion and “on top of that there will be an effective £6 billion of compensation for public sector employees.”

In its initial response to the Budget on Wednesday, the IFS said that it was “always obvious” that income tax, VAT, or NI would have to increase.

“Somebody will pay for the higher taxes—largely working people,” Johnson said.

Chancellor of the Exchequer Rachel Reeves poses outside 11 Downing Street with her ministerial red box, before delivering her Budget in the Houses of Parliament in London, on Oct. 30, 2024. Lucy North/PA Wire

Stamp Duty Land Tax

The IFS was not wholly critical of the Budget and said that tax rises were “always a near-inevitability.”

However, in its initial response, it gave a scathing criticism of the government’s plans to increase stamp duty land tax surcharge for second homes and buy-to-let by 2 percent, bringing it to 5 percent, which Johnson called one of the chancellor’s “deeply disappointing” decisions.

“I have said again and again that stamp duty land tax is among the most economically damaging of all our taxes, and yet we have it increasing again. The increase may just be on second properties, but it is renters who will pay part of the cost as the supply of such properties falls,” Johnson wrote.

The government has also decided not to extend tax relief for first-time buyers.

Coventry Building Society said the rise in stamp duty could end up having a knock-on effect on landlords and renters.

Jonathan Stinton, head of intermediary relationships at the building society, said, “It’s a significant blow to the sector and, without dramatic housebuilding to improve supply, it could lead to a shortage of rental homes, and push rents up.”

No Future Tax Rises

Responding to the IFS analysis, Downing Street denied that future tax rises will be needed to avoid cuts.

Prime Minister Sir Keir Starmer’s official spokesperson said: “No. The chancellor set out the spending envelope over the course of this Parliament. It results in day-to-day funding growing an average of 2 percent per year in real terms.

“It is a significant increase in investment in our public services compared to the plans that this government inherited, and it required a significant set of choices and trade-offs in the Budget yesterday.”

“Obviously, the next spending review will set out departmental plans beyond 2025/26 and it will also set out a significant public sector reform agenda alongside that,” the spokesperson added.

PA Media contributed to this report.