NIESR Urges Rachel Reeves to Raise Income Tax in Upcoming Budget

The National Institute of Economic and Social Research (NIESR) has called on the UK’s Chancellor of the Exchequer, Rachel Reeves, to implement a minimum increase of 2 pence in the basic rate of income tax. The recommendation arises as the Chancellor faces a daunting challenge: addressing a projected £50 billion shortfall in the UK’s public finances ahead of the Autumn Budget scheduled for November 26, 2023.

NIESR’s analysis indicates that Reeves is expected to miss one of her key fiscal targets by £38.2 billion in the financial year 2029-30. The think tank advises that increasing income tax is a necessary step, as opposed to making numerous minor adjustments to marginal tax rates, which they argue would be detrimental to the economy over time.

According to NIESR, a 2 pence increase on the current 20% basic rate of income tax could generate approximately £20 billion in additional revenue. Furthermore, a 5 pence rise on the 40% higher rate could provide an extra £10 billion, with a similar increase in the upper band expected to yield around £500 million.

Stephen Millard, NIESR’s Deputy Director for Macroeconomics, emphasized that Reeves must make “brave choices” if she is to effectively navigate the fiscal landscape. He stated, “She will likely need to break her manifesto pledge by raising income tax – rather than attempting to fill the gap by making numerous changes to marginal taxes – as this would be the least bad option for the economy.”

Millard advocates for a balanced approach that incorporates both tax increases and spending cuts. He believes such measures are essential for stabilizing the UK economy and public finances, which would subsequently enable the government to pursue its objectives of fostering economic growth and enhancing living standards across the nation.

Adding to this perspective, David Aikman, a Director at NIESR, highlighted the importance of political will in implementing these changes. He stated, “The economics are clear; what is required now is political will – the readiness to take difficult decisions on tax and spending in this Budget in the long-term interests of the UK economy.”

As the government prepares for the upcoming budget announcement, the recommendations from NIESR underscore the critical need for strategic financial planning to ensure economic stability and growth in the face of significant fiscal challenges.