Chancellor Rachel Reeves has been warned that tweaking small levies and relying on the wealthy to contribute to the state would hinder growth as another prominent report has called for Labour manifesto commitments to be reversed.
In a report by the Institute for Government (IfG), Labour strategists were criticised for the party’s “original sin” of making pledges not to raise income tax, national insurance and VAT.
The IfG suggested that manifesto commitments should be re-considered at this year’s Budget, making it the second influential think tank in two days to push for radical reform after the left-leaning Resolution Foundation said Reeves should raise income tax and simultaneously cut national insurance for workers.
The Whitehall-focused think tank also warned that small tax grabs to rebuild the fiscal headroom could lead to a deeper crisis faced by Labour in the polls, as well as worsen standards of living for Brits in the longer term.
“Small, isolated changes can create a concentrated group of losers and attract outsized bad press,” the report’s authors wrote.
“Reeves will ultimately be judged as chancellor by the effects of her policies on the economy and households.”
George Osborne’s so-called “omnishambles Budget” in 2012 was cited as a possible trap Reeves could fall into.
Rachel Reeves urged to make better tax decisions
IfG economists said a tendency to rely on “smaller and less salient taxes” – such as a health levy and the insurance premium tax – exacerbated inefficiency in the HMRC’s wider system while also failing to promote a coherent strategy.
“It appears that any measure that might be politically palatable could be on the table, whether or not it serves the growth mission or any other government objective.
“This uncertainty is itself damaging for growth, and can deter businesses from investing.”
Wealth tax warning
Economists also warned that Labour MPs’ calls for a wealth tax to be introduced would make tax collection more “risky” and make it more vulnerable to behavioural changes given possible exits of the richest taxpayers.
While it said capital gains taxes could be increased in line with income taxes and reforms should take into account the base costs of assets over time in order to bolster investment incentives, a singular approach to taxing the rich could be damaging for the UK’s public finances.
Its set of proposals include an improvement to property taxes – believed to be under discussion at the Treasury – and “moving to a uniform rate of VAT” as well as lifting the tax burden on businesses.
IfG economsits emphasised that Labour had to “articulate how it wants the tax system to contribute to its priorities” as Reeves was told the Treasury had to make better use of reviews and analysis to inform policymaking.
Tom Pope, the IfG’s deputy chief economist who authored the report, said: “With tax rises all but inevitable, [Reeves] should reject the path of least resistance, often taken by her predecessors, of raising taxes in an inconsistent way based on what seems easiest.
“Instead, now is the time to commit to tax reform and lay out an agenda on tax that fits with her broader growth objectives.”