As the UK government approaches its crucial first Budget scheduled for 30 October, Chancellor Rachel Reeves is preparing to address a significant financial challenge. Since taking office in July, Reeves has identified a £22 billion overspend in the current tax year, raising concerns about a potential “black hole” in public finances.
Reeves has firmly ruled out borrowing to fund day-to-day spending, indicating that tax increases are likely necessary to cover these financial gaps. However, finding a solution will not be straightforward. The Chancellor is tasked with identifying around £20 billion in new revenue, which may primarily affect future budgets rather than the current fiscal year.
The upcoming Budget is anticipated to include an updated economic forecast, revised projections for government revenue and spending, and potentially new fiscal targets. Given these evolving parameters, many factors will influence Reeves’ approach to taxation by the time of the Budget announcement.
In a series of five interviews on BBC Radio 4’s PM, the public is being invited to contribute ideas as the program explores various potential solutions to the fiscal shortfall. Traditionally, a Chancellor might consider raising the rates on major taxes such as income tax, VAT, National Insurance, or corporation tax, which collectively generate about two-thirds of government revenue. However, Reeves has previously committed to not increasing these taxes, complicating her task.
One potential route for raising funds could involve capital gains tax, which is levied on profits from asset sales, such as second homes or stocks. However, experts suggest that this method is unlikely to generate substantial revenue in the short term. Similarly, while inheritance tax primarily affects wealthier individuals, its capacity to contribute significantly to the £20 billion target is limited.
Another avenue could involve reforming the tax treatment of pension contributions. Currently, individuals can make contributions to their pensions without incurring income tax, and employer contributions are exempt from National Insurance. Together, these allowances cost the exchequer around £50 billion annually, with the majority benefiting higher earners.
Tax experts argue that reviewing pension tax relief could yield significant revenue, as the current system exhibits numerous inconsistencies. For example, high earners receive more generous tax relief on their contributions, creating an imbalance that a reform-minded Chancellor might aim to address.
Sir Edward Troup, a former Treasury tax lawyer, expects Reeves to pursue reforms in this area, although the extent and speed of these changes remain uncertain. The Chancellor faces a decision: should she aim for immediate revenue generation or implement gradual reforms that may take years to fully realize?
While a £20 billion tax increase may sound substantial, it translates to roughly £6 per week for every individual in the UK, or £25 weekly for a family of four. In broader fiscal terms, this amount represents less than 1% of the nation’s annual income and about 1.7% of total government spending.
With time running short, all eyes will be on Rachel Reeves to see how she navigates these challenges in her upcoming Budget announcement.
