Despairing economists warn Reeves’s income tax U-turn will make system ‘too complicated’ – and will wipe out buffer zone
Sign up to our free Brexit newsletter for our analysis of the continuing impact of Brexit on the UKSign up to our free newsletter for the latest analysis on Brexit's impactSign up to our free newsletter for the latest analysis on Brexit's impactRachel Reeves’s former top adviser has joined leading economists in warning that her decision to abandon income tax rises in the upcoming Budget and pursue smaller interventions will “overcomplicate” the system.The chancellor was widely expected to hike income tax in her fiscal plans later this month to fill a significant hole in the public finances. But the Financial Times has reported she has “ripped up” her earlier proposals and will look at different ways to shore up the fiscal deficit.open image in galleryPrime minister Keir Starmer and chancellor Rachel Reeves have come under pressure in the lead-up to the Budget on 26 November (PA Wire)However, economists have warned that the chancellor will not be able to create the buffer zone she wants to protect the UK against further global shocks by relying on introducing “inefficient” new taxes.The revelation late on Thursday night has been taken as a sign of a government in panic after another week of damaging headlines following an attempt by figures in Downing Street to brief that health secretary Wes Streeting was planning a coup.Jim O’Neill, the former Treasury minister and Goldman Sachs boss who was brought in by the chancellor to be her economic adviser in opposition, described the developments as “bothersome”.open image in galleryReeves has decided to ditch income tax rises (AFP or licensors)He said: “I’m surprised. If it means their defaulting to accumulated fringe, possibly growth-damaging taxes again, it will be bothersome.”The decision not to increase income tax means that a shopping basket of smaller interventions is now back on the table.This includes a gambling tax, a bank levy tax, various wealth taxes, including a mansion tax on properties valued at £2m and over.Stephen Millard, deputy director of the National Institute of Economic and Social Research (NIESR), warned: “There are two dangers here. First, by resorting to smaller changes to lots of marginal taxes, the chancellor risks making the overall tax system ever more complicated and inefficient (in the sense of creating more distortions in the economy). “Second, this would make it harder for the chancellor to build a large buffer against her fiscal rules. As we’ve seen over the past year, having a small buffer creates uncertainty and endless speculation about further tax rises, given it would only take a small downgrade in the UK’s growth prospects to wipe the buffer out.”Tax expert Dan Neidle told the Independent that seeking to raise money from ‘grab bag’ of lots of different tax measures instead would be “very damaging”. Isaac Delestre, senior tax analyst at the Institute for Fiscal Studies (IFS), said: “We obviously don't know how much she’s looking to raise, but the risks of doing something unnecessarily economically damaging increase if she is going to look to raise large amounts from smaller taxes.”He suggested: “One other obvious option that could raise a lot of money is looking at income tax thresholds (the Labour manifesto pledge on IT, NICs & VAT only talks about rates of income tax). Although worth noting that in real terms, thresholds have already come down a lot since 2021 because they’ve been frozen in real terms.”open image in galleryJim O’Neill, who was an adviser to Reeves, described the developments as ‘bothersome’ (PA)However, Bloomberg reported that Ms Reeves received an improved fiscal forecast from her budget watchdog, putting the fiscal hole at £20bn, leading her to drop plans to raise income tax rates, people familiar with the matter said.A black hole of £20bn is challenging but much less than the £30 to £40bn previously estimated.The head of the Resolution Foundation think tank Ruth Curtice warned the government against the amount of pre-Budget wrangling that has been done in public. “It is normal for economic forecasts and policies to change in the run up to the Budget. It is not normal for so much of that to be laid bare in public,” she said. “The market moves this morning and in recent weeks suggest a serious look should be taken at the approach to market-sensitive forecast information.”The chancellor had seemed to lay the groundwork to hike income tax in an attempt to fill the hole in the public finances, warning earlier this week that keeping to the manifesto would signal “deep cuts” to public investment.But the Financial Times has reported that she has now abandoned those plans over fears they could anger both voters and backbench Labour MPs.One Labour MP told The Independent: “I don’t think they have a clue.”“They’re making even good news look bad.”It was also understood that chief of staff Morgan McSweeney and welfare secretary Pat McFadden’s warnings about breaking Labour’s manifesto pledge on not raising income tax, national insurance or VAT had won the argument.Culture secretary Lisa Nandy said on Friday morning that ministers are working on “making the fairest possible choices”.Speaking to Times Radio, she described Budgets as “the subject of a lot of work and careful consideration and, in our case as a government, about making the fairest possible choices so that we can help the economy to grow, and we can also ease the pain that people have been put through over the last decade-and-a-half.”The decision on income tax was said to be communicated to the Office for Budget Responsibility (OBR) on Wednesday, when the chancellor submitted a list of “major measures” to be included in her Budget on 26 November, according to the FT.An income tax rise would help her bridge a fiscal black hole estimated by some economists to be as much as £50bn, but it would also break Labour’s clear manifesto pledge not to raise income tax, national insurance or VAT.
