Rachel Reeves is considering offering entrepreneurs new tax reliefs, reports have suggested, as she bids to build a bigger fiscal headroom by the Budget.
The Chancellor is poised to build a larger headroom according to her rule to match tax intake with day-to-day spending over a rolling three-year forecast period.
As part of an effort to limit the damage to the current headroom of £9.9bn due to productivity downgrades by the Office for Budget Responsibility (OBR), Reeves is reportedly discussing offering innovators a tax break.
One of the options being considered is reducing the amount that companies pay for patents and other legal rights, according to The Times.
While the measure would reportedly cost around £1bn in the short term, the OBR may positively judge productivity improvements to be worth up to £10bn by the end of parliament.
The new tax incentive would represent a policy aimed directly at influencing the OBR given its ongoing supply side review could lead to a damaging productivity downgrade and blow a more than £9bn hole in public finances.
Another measure could include an expansion of a Gordon Brown-era scheme that gives small companies special tax treatment when they offer employees share options.
Reeves expected to build bigger headroom
If the OBR judges these policies to be positive for growth and help boost tax receipts in the long run despite initial costs, they could go some way in reducing the costs faced by Reeves.
But productivity-boosting tax cuts alone are unlikely to keep her headroom intact.
The Chancellor is widely predicted to give herself greater headroom than £9.9bn later this year, a figure that has become the bane of top City economists for not affording the government enough protection in the face of economic shocks.
The narrow margin has left Reeves scrambling to find extra cash reserves to meet her rule to balance taxes and day-to-day spending, with tariffs and welfare savings U-turns leaving wiping out her buffer.
Economists at the National Institute of Economic and Social Research (NIESR) and OECD have warned that her small fiscal buffer has left the UK’s finances on shaky footing.
UK government bond yields have also jumped higher than European counterparts, with the ten-year bond yield – which directly affects government borrowing costs – being more than 0.4 points than levels seen a year ago.
Reeves is still expected to make sweeping tax hikes at the Budget, targeting richer Brits to make greater “contributions”.