Reeves urged to overhaul tax system and hike levies in breach of manifesto

Chancellor Rachel Reeves should use her Budget to raise major taxes and overhaul the system instead of “picking from a Scrabble bag of lots of little individual tax rises”, experts have suggested.

The Government is under pressure to balance the books ahead of November’s autumn statement amid warnings of a black hole estimated to be as much as £50 billion in the public finances.

After raising taxes by £40 billion last year, the Chancellor is widely expected to be preparing further hikes as she battles to stick to her election promises and self-imposed debt targets.

Economists told the Commons Treasury Committee on Tuesday that the current tax system is overly complex and inhibiting the growth ministers are seeking.

Dan Neidle, founder of Tax Policy Associates, said Ms Reeves “has to raise tax” in one of two ways.

“One is by raising one of the main taxes – perhaps a breach of a manifesto pledge, possibly by expanding the base of VAT.”

Ms Reeves has insisted she will stick to Labour’s manifesto pledge not to increase income tax, national insurance or VAT, narrowing her options for raising revenue.

Mr Neidle continued: “The less wise way to do it is by picking from a Scrabble bag of lots of little individual tax rises.”

He said that would risk further complicating a tax system that has seen “30 years of minute changes here and there”.

“I would hope that, as well as addressing the immediate fiscal issues, she steps back and thinks about ways that you could reform the tax system to be pro-growth, which we have rarely seen in the last few decades. But now I think it’s become quite desperate.”

He pointed to corporation tax, which is rated in the UK as one of the least competitive in the world, lagging behind countries with higher rates.

“The reason is complexity,” he said, as he called for a “radically different approach to simplification”.

“You need a political commitment to simplification, a small body of smart people with a junior minister responsible, whose job was to identify areas in the tax code where you can eliminate whole series of rules and legislation without a net fiscal consequence.”

Helen Miller, director of the Institute for Fiscal Studies, said reform did not mean ripping up the rulebook in the November Budget.

“It’s that we have a really clear sense of what we’re trying to achieve, and we start making consistent steps towards that, rather than what currently we do is take some steps towards it, some steps away from it,” she said.

Ruth Curtice, chief executive of the Resolution Foundation think tank, cautioned that “we do start short of money”.

“I agree with all of that, but I think we do have to acknowledge that it is likely we are £20 (billion) or £30 billion short of the tax revenue that we need. And in that case, there will be more losers than winners, and that is in some sense unavoidable…

“We can’t avoid the first challenge of this Budget, which is to find that money.”

Ms Curtice argued that taxes should rise.

“When you look at the cost of borrowing for the UK relative to other countries, it’s one of the highest of rich countries. And the position that we face, there is a strong case for raising taxes at this Budget.”

Ms Miller noted that if Britain’s interest rates bill was a Government department, if would be the second biggest in Whitehall.

She said the Chancellor should make a plan to reform the tax system that is “credible” to the people who are lending the Government money.

“Lots of governments are trying to borrow lots of money. Borrowing rates are high. Our interest rate bill would be the second biggest department if it were a department,” the IFS director said.

When she entered the Treasury, Ms Reeves set out two key fiscal rules: the first to ensure that day-to-day spending is matched by tax revenues by 2029-30 rather than borrowing; and the second to reduce net financial debt as a share of the economy.

Arun Advani, economics professor at the University of Warwick, told MPs that the way to get growth from the tax system “is not trying to pick off individual bits of legislation that you can carve away and work out which exact rule you can remove, it’s about changing the structure of the tax system so we don’t need those rules”.

He said capital gains tax was an example of a levy that needed to be fixed, proposing to equalise rates with income tax rates while introducing an investment allowance.

“That removes the incentive to shift income, as people have now, into capital gains,” he said.