A leading economic thinktank has issued a stark warning to the government. The Institute for Fiscal Studies cautions Chancellor Rachel Reeves, it advises against a half-baked dash for revenue. This search for funds must not damage economic growth. The UK is currently in a difficult fiscal bind. Reeves seeks to close a large budget gap next month.
Therefore, the IFS warns of unnecessary economic damage. It says stitching together random tax measures is risky. This approach could hurt incentives to work and productivity. Furthermore, it may slow down overall economic growth. The thinktank emphasizes that politics should not override economics. A budget focused purely on politics could prove considerably worse.
However, the IFS also sees a potential path forward. The UK could raise significant funds through thoughtful reform. The chancellor could raise tens of billions without breaking pledges. This requires tackling longstanding inefficiency and unfairness. The current fiscal bind demands smart solutions, not quick fixes.
Moreover, Reeves has already ruled out some major tax hikes. She will not raise income tax, national insurance, or VAT. This leaves her searching for other revenue sources. She faces pressure from multiple sides. Rebel Labour MPs have forced spending cut reversals. Meanwhile, high borrowing costs deter more government debt.
Consequently, Treasury officials are examining several options. They need to close a twenty to thirty billion pound gap. The chancellor also wants a larger budget buffer. This would provide greater flexibility for future pressures.
Furthermore, the IFS report highlights specific areas for reform. Taxes on savings and investment income need modernization. This includes rental, dividend, and interest income. Reforming pension taxes could also raise billions. For example, levying national insurance on employer pension contributions might raise six billion pounds annually.
However, another significant opportunity involves the tax gap. Small businesses currently pay only forty percent of owed tax. Closing this gap could recover over ten billion pounds. This would involve returning to compliance levels from just a few years ago.
Therefore, a senior IFS economist summarized the challenge. He said revenue-raising is a major goal for the budget. However, merely collecting more revenue is not enough. The chancellor must tackle inefficiency and unfairness. After all, this is the only way to limit economic damage. The UK’s fiscal bind requires careful, deliberate action. Directionless tinkering would be a mistake for the nation’s economy.
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