IFS warns Chancellor needs £25bn tax raid ahead of Budget

Rachel Reeves needs a £25billion tax bomb to meet pledges and balance the books after her public sector pay splurge, a grim report warned today.

The grim assessment comes from the respected IFS think-tank as the Chancellor prepares for the October 30 Budget.

The huge raid would be nearly double the size of the coalition's austerity measures after the credit crunch - with fears that national insurance, pension pots, inheritance tax and capital gains will be in the firing line.

Keir Starmer fuelled alarm at PMQs yesterday as he repeatedly refused to rule out hiking employers' NICs. There is mounting speculation that Ms Reeves will impose the levy on firms' contributions to pensions, which could potentially raise £17billion a year.

Tax-free access to pension pots could also be hammered, while many expect increases to inheritance tax and moves to milk entrepreneurs.

The 5p reduction on fuel duty brought in by Rishi Sunak is also widely predicted to be axed. 

Meanwhile, Ms Reeves could loosen fiscal rules so that the government can borrow up to £60billion more, despite concerns about rising costs of servicing the £2.7trillion UK debt mountain. That will be pumped into infrastructure spending, with HS2 set to run to Euston and a new 'light' link from Birmingham to Manchester being mulled. 

In the report published today, the IFS concluded that the Chancellor would need a tax rise of £16billion to remain on course to balance the budget in 2028/29 if there are no cuts to spending outside of public services. 

This would be on top of the £9billion tax rise from measures set out in Labour's manifesto, adding up to almost £25billion in total – equivalent to around £900 per UK household.

But the party's pledges not to raise income tax and corporation tax or to increase National Insurance or VAT mean she may struggle to implement a tax rise on that scale.

It would be bigger than the net tax increases from July 1997, which was £14billion, and October 2010, which came in at £13billion.

The report states: 'Ensuring all departments see their day-to-day budgets rise at least in line with national income would require a further top-up of £17billion. Combining this with a fresh £16billion (0.5 per cent of national income) tax rise would restore the forecast current budget to balance in 2028-29.

'This would, of course, need to come on top of the £9billion of specific tax rises set out in Labour's manifesto, so would be a tax rise of around £25billion in total. A net tax rise of this scale would be bigger than in the July 1997 and October 2010 Budgets, both of which took place early in the parliament of a new government.' 

IFS director Paul Johnson said Ms Reeves' first Budget, which she will deliver on October 30, could be 'the most consequential since at least 2010'.

He added: 'The new Chancellor is committed to increasing investment spending and to funding public services. To do so, she will need to increase taxes, or borrowing, or both.

'Taxes are at an all-time high, and she is tightly constrained by her pledges not to raise the main rates of income tax or corporation tax, or to increase National Insurance or VAT at all.

'The temptation then is to borrow more, perhaps changing the definition of debt targeted by the fiscal rules. 

But, given her pledge to balance the current budget, that would not free up additional resource for day-to-day spending and in any case is not risk-free given the dual deficits – that is, both budget deficit and current account deficit – being run by the UK.'

He said any changes to capital gains tax would need to be a 'careful reform' rather than a simple increase. There is also speculation that Labour could make changes to inheritance tax.

Currently, employers pay NICs at 13.8 per cent on workers' wages above £9,100 a year.  

But firms do not pay any National Insurance on money they pay into pensions on behalf of their staff. 

The IFS has previously suggested the rule 'should be reformed', calculating that if employers were charged NI on pension contributions at the same rate as wages - 13.8 per cent - it could raise £17billion a year.

Tom Selby, director of public policy at stockbroker AJ Bell, said: 'This seems the most straightforward way to raise cash quickly if the Government wants to raise money from pensions. It wouldn't be a surprise.'

However, Mr Selby said he would expect there to be a reduced tax rate on employer contributions, rather than the full 13.8 per cent tax charge.

There have been warnings the step would hammer pension pots and undermine efforts to shore up poorer workers' savings with auto-enrollment.

During the first PMQs clash since party conferences, Mr Sunak asked the premier whether his vow not to increase NICs extended to employer pension contributions.

But Sir Keir merely said he would not talk about the Budget, and swiped that Mr Sunak was the 'expert's expert on raising taxes'.

A spokesman for HM Treasury said: 'It's right to say that we have inherited a tough financial position, but we won't let the challenges of the past define our future. 

'Despite uncovering a £22billion black hole in our public finances we are focused on making this the most pro-growth Treasury in history, built on the rock of economic stability, including robust fiscal rules that were set out in the manifesto.

'That is how we will fix our public services and deliver on the promise of change.' 

The IFS report was funded by the Nuffield Foundation charitable trust and used economic forecasting by the banking firm Citi.