The chancellor should be “bold” in next month’s Budget or risk future spending cuts and tax rises, an influential think tank has said.
The Institute for Fiscal Studies (IFS) is projecting Rachel Reeves will need to find £22bn to make up a shortfall in the government’s finances, and will “almost certainly” have to raise taxes.
Finding this amount would allow the government to maintain the £10bn of headroom it has built into the system – but the IFS says there is a “strong case” for trying to increase it beyond this amount.
IFS director Helen Miller said the lack of a bigger buffer brought with it instability, and could leave the chancellor “limping from one forecast to the next”.
“A key challenge is ensuring that fiscal groundhog day doesn’t become a twice-yearly ritual,” Ms Miller said.
She said the position the chancellor finds herself in was “to a large extent, a situation of her own making”.
“When choosing to operate her fiscal rules with such teeny tiny headroom, Ms Reeves would have known that run-of-the-mill forecast changes could easily blow her off course,” Ms Miller added.
The £10bn margin Reeves left herself after her Spring Statement in March was the third lowest margin a chancellor has left themselves since 2010. The average headroom over that time is three times bigger at £30bn.
The guidance from the IFS comes as latest figures show the UK economy grew slightly in August.
The think tank pointed to rising borrowing costs, weaker growth forecasts and spending commitments made since the spring as reasons for the government’s tight position.
It said Reeves needs to make up that shortfall so she can meet her own fiscal rules, which she has called “non-negotiable”.
The two main rules are:
- Not to borrow to fund day-to-day public spending by the end of this parliament
- To get government debt falling as a share of national income by the end of this parliament
Ms Miller added that the “constant obsession with the headroom” was a distraction from important debates on how policy could bolster economic growth and the reform of the tax system.
Speaking on Wednesday, Reeves gave the strongest indication to date that she is planning to raise taxes in the Budget.
The IFS’s green budget looks ahead to some of the decisions the government will have to make in its 26 November Budget. The report is funded by the Nuffield Foundation and produced in association with Barclays.
In a chapter of its report published earlier this week, the IFS said Reeves could raise tens of billions of pounds a year more in revenue without breaking manifesto promises, but this would not be straightforward.
During last year’s election, Labour said they would “not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT” – which the IFS flags as the simplest ways to raise revenue.
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