Economic analysts believe that Chancellor Rachel Reeves will need to break Labour’s manifesto promise to UK workers.
That’s because the Chancellor has a massive problem to fix, which is a gaping economic and financial black hole estimated to be around £41.2 billion.
Reeves finds herself in a particularly challenging position, tasked with revitalising the UK economy while simultaneously trying to restore stability to the public finances.
She is operating in challenging circumstances in which economic growth is stagnant, and borrowing is high. She also must stick to the tight fiscal rules put in place by her own Government.
So far, little detail has emerged regarding the Chancellor’s approach to taxation. All eyes are now on the upcoming Autumn Budget, which will provide clarity and whether the Chancellor will stick to Labour’s manifesto.
Given the economic landscape, many experts believe Reeves may have little alternative but to break the manifesto pledge and increase taxes on workers to help fix the economy.
The National Institute of Economic and Social Research (NIESR) estimates that the Treasury is facing a daunting £41.2 billion budgetary shortfall ahead of the Autumn Budget.
Some financial experts have gone further, suggesting that the situation could require intervention from the International Monetary Fund (IMF).
Professor Stephen Millard, Deputy Director of NIESR, has highlighted the difficult choices the Chancellor may be forced to make. Speaking to The Independent, he said:
“Really, given the gap that we think is, she’s got to go back on her manifesto pledge, raise one of the big three taxes. I think that’s the only way she’s going to be able to generate enough money.
Spending which is permanent needs to be financed by permanent taxation. That’s an issue. If increases in spending are expected to be temporary, they need to be financed through borrowing.
If you were looking to raise £40bn, it would be difficult to do that without touching any of the big taxes.”
While no official decisions have been announced, the growing sense of uncertainty is causing considerable anxiety among both taxpayers and businesses.
Many are now questioning how secure their financial position is, given the noise around taxes, as well as increasing costs and rising inflation.
Unsurprisingly, speculation around potential tax changes is intensifying in the lead-up to the Autumn Budget.
A few ideas have been speculated that could impact UK taxpayers if introduced, but stick to Labour’s manifesto pledge.
Among the possibilities are the introduction of a wealth tax, a national property tax, and a mansion tax. A wealth tax would involve levying on individuals’ total net assets, rather than just income.
A property tax could form part of a comprehensive reform package. This includes scrapping stamp duty, implementing a national property levy, and overhauling Council Tax and Capital Gains Tax.
In addition to this, there has also been talk of an additional National Insurance contribution being imposed on landlords.
There is also the possibility of a mansion tax, which would see basic and higher-rate taxpayers paying a levy on the sale of their house or property. Basic taxpayers would face an 18 per cent levy, with the levy rising to 24 per cent for higher-rate taxpayers.
These proposed changes could, in theory, allow Reeves to honour Labour’s manifesto promise while still addressing the fiscal gap.
However, it remains to be seen if these changes would have the impact required to fix the UK’s economic issues. Many financial experts believe these won’t be enough if introduced in the Autumn Budget.
While the exact policy direction remains unclear, further speculation is likely to increase as the Autumn Budget approaches, but you can prepare ahead of time.
Understanding your own financial position will help you tackle any changes that come during the Autumn Budget.
With energy bills and inflation continuing to rise, any potential adjustments to tax, whether Income Tax or National Insurance, will have a significant impact on your finances.
Finance experts can help you navigate the potential changes ahead and put an effective plan in place.
Get in touch with our team to understand your financial position.
