Influential thinktank says directionless tinkering could cause unnecessary economic damage as Chancellor faces £20bn-£30bn budget shortfall on November 26th.
Chancellor Rachel Reeves must avoid “a half-baked dash for revenue” ahead of her Autumn Budget on November 26th or risk damaging economic growth, the Institute for Fiscal Studies has warned.
With just weeks until the Budget, the influential thinktank says Reeves could raise tens of billions of pounds without breaking Labour’s manifesto pledges, but cautions that simply increasing rates on poorly designed property taxes would hurt productivity.
A more rational tax system required
Isaac Delestre (pictured), a senior research economist at IFS and co-author of the report, says: “The last thing we need in November is directionless tinkering and half-baked fixes. There is an opportunity here. The Chancellor should use this Budget to take real steps down the road towards a more rational tax system that is better geared to promoting the prosperity and well-being of taxpayers.”
The warning comes as Treasury officials consider several options to close a spending gap of £20bn to £30bn, with Reeves having ruled out increases in income tax, national insurance and VAT before the Budget.
These three taxes account for around 75% of the Treasury’s income, forcing the Chancellor to look at alternative funding sources.
Stamp duty damages market
The IFS says rumoured plans to extend national insurance to rental income would be counterproductive without proper reform of the property taxation system.
It argues that stamp duty discourages people from moving and slows the functioning of the rental market, acting as a drag on the wider economy.
The thinktank says stamp duty “effectively throws sand in the gears, leading to an inefficient allocation of property” and that a well-designed approach would have no place for it at all.
Stamp duty is forecast to bring in £24.5bn by 2029-30, making it a significant source of funds, but the IFS describes this as regrettable because taxing asset transactions impedes mutually beneficial exchanges and prevents assets being sold to those who value them most.
Instead, it urges the Chancellor to replace the levy with a reformed council tax proportional to up-to-date property values.
The report says: “Council tax should be turned into a tax proportional to up-to-date property values, set at a rate that would replace the revenue from stamp duty on housing as well as existing council tax revenue.”
Council tax reform
The thinktank points out that council tax bands in England are ludicrously outdated, still based on property values from 1991, creating unfairness across the system.
It adds that income from business rates and stamp duty on commercial property should instead come from a levy on the value of non-residential land, excluding buildings, so as not to discourage development and use of property for business purposes.
The IFS says there is a case for raising a larger share of receipts from land and property, since land is in fixed supply and cannot move, meaning it causes less economic distortion and is more favourable to investment than other levies such as income tax.
Reform over rate rises
IFS director Helen Miller says: “There is an opportunity to be bold and take steps towards a system that does less to impede growth and works better for us all.
“Muddling through by simply raising rates of current taxes might appear the easier option – Rachel Reeves’s predecessors in the Treasury have all too often shied away from taking bold steps to improve the tax system.
“But relying on badly designed taxes to bring in additional revenue will bring unnecessary economic damage.”
Miller adds that reform means there could be some winners alongside the inevitable losers, saying: “If you do a reform approach, you can say you’re doing something for a principled reason, and make the system better, make us all better off, ultimately.”
The body warns that a budget focused purely on politics could prove considerably worse on the economics, and that if Reeves is considering increasing levies on returns to capital, such as rental income, dividend income or capital gains, proper reform would reduce the disincentive effects on investment.
