A ‘steady-as-she-goes’ Budget is not an option available to the Chancellor, the IFS stated – Wiktor Szymanowicz/Future Publishing
John Healey faces a £35bn shortfall in his maiden Budget, raising the prospect of a significant tax raid, Britain’s top economic think tank has warned.
The Institute for Fiscal Studies (IFS) said the Chancellor faces the bill to maintain existing spending policies and to boost defence funding.
Without cuts to benefits, he will be forced to launch a tax raid on Britain’s struggling households and businesses, it warned.
It comes after the Prime Minister ruled out cutting the ballooning benefits bill to fund defence spending, telling the Commons last month that supporting national security “can’t come at the expense of social security”.
Helen Miller, the director of the IFS, said that if Andy Burnham wants to avoid cuts to public services and benefits over the next five years, his Government will have to raise taxes.
She said: “If you are looking at 10s of billions of increase in spending, you should be thinking of 10s of billions of increase in taxes.”
The IFS said rising inflation will erode the budgets of government departments, meaning the Chancellor will face a shortfall to pay for its spending commitments.
In addition to a proposed 3pc defence spending target, the Prime Minister is also seeking to fund a new national care service and a drive to build more council houses.
Mr Burnham has repeatedly downplayed the prospect of cutting welfare spending. Speaking on the Rest Is Politics podcast on Monday, the Prime Minister said there must not be a trade off between defence and welfare.
He added: “I think that is a mistake to put those two as one can be ransacked to pay for the other because we will not be in a resilient position if we have a situation where millions of young people are not in education, employment training without any hope.
“That doesn’t, in my view, leave us in a position where we’re ready to face the future.”
However, Mr Healey has insisted the Government has a “moral duty” to address benefits spending, saying a spiralling bill was “not progressive”.
In its report before the Budget, the IFS said: “A choice to leave spending totals unchanged would implicitly be a choice to cut some budgets and allow the quality and/or quantity of some public services to fall.
“On the other hand, increasing spending to avoid cuts to budgets and fund higher defence spending could require tax rises or benefit cuts of around £35bn.
“The Chancellor must decide where to land on that spectrum.”
Ms Miller warned that “a ‘steady-as-she-goes’ Budget is not an option available to the Chancellor”.
Labour has already presided over the biggest tax-raising Parliament on record in its first two years in office, said Ms Miller. Rachel Reeves, the former chancellor, hit households and businesses with raids totalling £50bn during her tenure, according to the IFS.
Raising another £35bn per year for the Exchequer is equivalent to adding 3p to every income tax rate band, or 3p to VAT.
However, Labour was elected on a manifesto which included promises not to raise income tax, National Insurance contributions, VAT or corporation tax. Over the weekend, the Government also ruled out plans to extend the so-called “mansion tax” to £1.5m homes, as well as a raid on warehouses following backlash from Tesco and John Lewis.
It means the Government is under intense pressure to raise more money with raids on wealth, including through capital gains tax. But the IFS said this type of levy risks harming the economy.
Ms Miller said: “Raising more taxes will drag on growth, but the extent of that will hinge crucially on which taxes are raised.
“The risk of having taken the big taxes off the table is that you end up fiddling with smaller, more damaging taxes and therefore doing more damage than you would need to do.”
Mr Healey is set to visit Bangkok for the International Monetary Fund (IMF) annual meeting this week, where he will discuss the need to implement credible plans to get borrowing under control.
Speaking ahead of the meeting, the Chancellor vowed to demonstrate “fiscal discipline” in his Budget on Oct 28, indicating he will not ramp up borrowing to cover the gap in funding.
He added: “This means breathing space for today and hope for the future.”
Last week, Andrew Bailey, the governor of the Bank of England, warned that Britain risked a repeat of the Liz Truss mini-Budget crisis unless the Government proved to financial markets its tax-and-spend policies were prudent.
Britain’s borrowing costs have surged in recent weeks over concerns about government spending and a global surge in inflation triggered by the Iran war.
While Mr Bailey did not directly mention the Budget, his intervention prompted anger inside the Government, with sources telling The Times it was not the governor’s job to “play politics”.
Andrew Griffith, the shadow chancellor, urged the Government to cut benefits to shore up the finances.
He said: “Higher borrowing costs and Andy Burnham’s unfunded spending commitments have swallowed up his headroom and created upward inflationary pressure,” he said.
“Families cannot afford to be lumbered with even more tax rises at this Budget. Labour should cut welfare instead of dumping on working people as they have already done.”
