Chancellor Rachel Reeves has been told to cut national insurance for workers by two per cent and raise income tax by the same amount, with economists at a left-leaning think tank claiming a £6bn gain in revenue could be made.
The Resolution Foundation, once the workplace of Treasury ministers Torsten Bell and Dan Tomlinson, has given credit to former Chancellor Jeremy Hunt for having “rightly identified an unfair double tax on work” as he cut the tax by two percentage points in last spring Budget.
Researchers at the influential think tank have now urged Rachel Reeves to go one further and potentially break a key manifesto pledge not to raise income tax.
They said that a further two percentage point cut to national insurance paid by workers on the payroll could be supported by a two per cent hike on income tax, which is also paid by pensioners, landlords and self-employed workers.
Its calculations suggest that Reeves would see a £6bn boost in the public purse, which could ease the damage she faces to her headroom at this year’s Budget in light of higher borrowing costs, expected growth downgrades by the Office for Budget Responsibility and policy U-turns on welfare.
Adam Corlett, principal economist at the Resolution Foundation, said the move could alleviate some of the pressures faced by Reeves while workers’ salaries would be protected.
“This should form part of wider efforts to level the playing field on tax, such as ensuring that lawyers and landlords face the same tax rates as their clients and tenants.
“These sensible reforms would raise revenue while doing the least possible harm to workers and the wider economy. And by acting decisively, the Chancellor can turn her full attention back onto securing stronger economic growth.”
Adding up small tax hikes
The Resolution Foundation also said the Chancellor could extend employers’ national insurance to limited liability partnerships, which can include large law firms, and raising taxes on dividends.
In a report detailing a number of possible tax policies to be considered by the Treasury, researchers also called for the VAT threshold of £90,000 to be gradually lowered over time to £30,000.
It said a reduction in the threshold would “stop small firms from bunching” below it and raise an extra £2bn for the Treasury.
Further taxes on sugary and salty food, long-haul flights, shipping and heavier vehicles would raise billions more, the report claims.
Tax reforms set out in the Resolution Foundation’s report may not altogether rebuild Reeves’ headroom given City estimates suggesting she will have to raise at least £25bn.
Goldman Sachs has suggested further tax hikes would fail to stabilise public finances, with cuts to welfare spending likely to be judged more positively by bond traders.