UK finance minister faces pressure for major tax hike – IFS

British finance minister Rachel Reeves may need to announce a £25 billion ($33 billion) tax increase in her first budget on October 30 to support public services like prisons and police, according to the Institute for Fiscal Studies (IFS).

Labour had proposed £9 billion in tax rises during its election campaign, but the IFS suggests larger increases are necessary to prevent government budgets from shrinking as a share of the economy.

IFS Director Paul Johnson stated that to fund public services and increase investment spending, the new chancellor will need to raise taxes, increase borrowing, or both.

The proposed £25 billion tax hike would represent nearly 1 per cent of national income and be almost double the size of tax increases following Britain’s last two major government changes in 2010 and 1997.

Labour’s sweeping election victory in July was followed by revelations from Reeves that the public finances were in worse shape than anticipated. Prime Minister Keir Starmer’s popularity has declined, partly due to cuts to winter fuel subsidies for pensioners.

Reeves plans to revise budget rules to target a balanced budget, excluding investment, rather than allowing a 3 per cent overall deficit.

The definition of public debt is also under review, potentially permitting £50 billion more borrowing. However, there is concern among foreign bond investors that these changes could lead to increased debt.

The yield premium on 30-year British government bonds over German debt recently hit its highest level since former Prime Minister Liz Truss’ budget plans disrupted markets in 2022. Reeves has assured that there will be “guardrails” around any additional borrowing to maintain market confidence.