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The Institute for Fiscal Studies (IFS) states that Chancellor Rachel Reeves will require billions of pounds more to meet pre-election promises of the government, despite £9bn tax rises set out in the Labour manifesto. The chancellor will need an additional £16bn to honour government promises of no return to austerity for public services and a boost to government investment, and prove beneficial to growth. The budget is set to be announced on 30 October, where Reeves will introduce how she plans to meet her manifesto promises.
Furthermore, the Chancellor will need to come up with a plan of action against self-imposed restrictions on borrowing, spending, and debt. The budget is considered a great opportunity to set the government’s priorities and values and to reset the political tone, notably after a recent negative backlash over clothing and hospitality donations. There are expectations that more of the tax burden may fall on higher earners due to the government’s decision to limit winter fuel payments to the poorest pensioners.
However, Reeves will present her first Budget amidst several obstacles. These include higher debt from the pandemic, higher payments of interest to finance that debt, and inflation levels, which have only recently returned to normal levels. Growing and ageing populations will also pose additional challenges, and the climate transition is presently imposing additional obstacles. In addition, the new government has inherited an “unenviable” situation with public finances, according to the IFS. Johnson stressed that if the Chancellor does not act on 30 October, it could pose issues before the next election.
The IFS, working with economists at Citi, researched how much additional revenue the Chancellor would need to meet government pledges to ensure day-to-day spending is paid for with tax revenues. The Chancellor has already planned £9bn of tax increases, which might be sufficient, given it maintains spending at present levels, including managing inflation. But public services, such as higher education and local government, and healthcare and the National Health Service will continue to struggle to meet current needs, and the government has made additional promises of healthcare staff and other reforms.
Therefore, to fulfil government promises, Reeves will require an extra £16bn in funding, which is approximately 2.8% of the size of the economy, and is predicted to grow to must transform public services. However, if spending increases only keep pace with inflation or keep steady as a proportion of the size of the economy, public services will continue to deteriorate. Although the increase is less than the 3.3% increase pledged by Rishi Sunak in 2021, and the 4.1% increase in average year-on-year spending promised by Boris Johnson in 2020, the Chancellor has indicated she may borrow more to fund investment spending, considering it as separate from day-to-day spending.
Furthermore, the Chancellor is widely expected to alter the way the UK measures its debt burden, resulting in changes in government borrowing constraints. Labour, before the election, intended to adhere to the Conservative pledges of the debt falling as a proportion of economic output by the fifth year of the forecast. The IFS recommended that although increased investment is essential in addressing low growth, “significant extra borrowing to fund that investment would be risky,” and additional tax may be required
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