Rachel Reeves faces £25bn tax hike to avoid austerity, says IFS

Rachel Reeves, the Chancellor of the Exchequer, is expected to introduce a £25bn tax rise in this month’s budget to avoid plunging Britain back into austerity, according to the Institute for Fiscal Studies (IFS).

The Financial Services Institute has warned that tax rises would need to be double those introduced by George Osborne in 2010 to ensure public spending can increase as promised, even with looser fiscal rules.

Reeves is said to be exploring increasing employers’ National Insurance contributions as a main option, after Sir Keir Starmer refused to rule out the move. Labour’s manifesto pledge to avoid raising taxes on “workers” does not cover employer contributions, and a 1% increase could generate an estimated £8.9bn. Labor is also considering measures such as adding VAT to private school fees and introducing a tougher tax on oil and gas companies, but the Institute for Fiscal Studies warns that these alone will not raise enough to protect public services from further cuts.

The Institute for Fiscal Studies estimates that even if Labour’s proposed tax reforms generate £9 billion, an additional £16 billion in tax rises will be needed to ensure departmental budgets grow in line with national income, making a total tax increase of £25 billion is necessary. This would exceed the tax increases imposed by Gordon Brown in 1997 and Osborne in 2010.

Paul Johnson, director of the IFS, said: “The first budget of this new administration could be the most significant since at least 2010. The new chancellor is committed to increasing investment spending and funding for public services. To do this, you will need to raise taxes, borrow, or both.

Reeves is also said to be exploring changes to pensions, such as reducing the tax-free lump sum people can receive on retirement from £268,275 to £100,000, and amending the rules around pension funds that pass on after death.

The Institute for Fiscal Studies predicts that even with optimistic economic forecasts, significant tax rises are needed to balance the books, especially as social care costs rise due to an aging population and rising debt interest payments. A Treasury spokesman said the government was focused on making the UK economy more growth-friendly despite the challenges.