Reeves must reform the tax system to raise tens of billions of pounds, the think tank says

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Chancellor Rachel Reeves needs to reform the tax system rather than a “half-baked rush for revenue” if she wants to raise tens of billions of pounds without causing undue damage to the economy, an influential think tank has said.

Raising big sums – without breaching Labour’s election manifesto pledges not to increase National Insurance, income tax or VAT – is possible, but not easy, the Institute for Fiscal Studies said on Monday.

The Institute for Fiscal Studies said many tax hike options outside of these “big three” taxes would be “particularly damaging” to growth, unless Reeves reforms property and capital taxes to create a fairer and simpler system.

Real estate tax reform – aimed at Scrap stamp feesHe added that reforming council tax and replacing business rates with a new tax on the value of non-residential land – should be high on the priority list.

“Almost any package of tax rises is likely to impact growth, but by addressing some of the inefficiencies and injustices of our current tax system, the Chancellor can limit the economic damage,” said Isaac Delester, chief research economist at the IFS.

He added: “The last thing we need in November is directionless tinkering and half-baked reforms.”

The IFS analysis comes as Reeves considers options to raise taxes to fill an estimated £20-30 billion fiscal gap in next month’s Budget.

Bond investors urged her on Build a larger financial reserve in public finances than it did last year, to avoid the need for further tax increases.

The IFS said Reeves could achieve this without touching the “big three” taxes but warned it faced “serious constraints” to raising revenue through other ways.

Extending the current freeze to include personal tax thresholds, and freezing National Insurance thresholds, could generate an estimated £10.4bn by 2029-30, but would not be in the spirit of Labour’s manifesto pledges, and would leave the amount raised “to the vagaries of inflation”, the IFS said.

An annual wealth tax would face “huge practical challenges” and risk pushing the wealthy out of the UK.

“If the finance minister wants to raise more money from the wealthy, a better approach would be to reform current wealth-related taxes, including capital gains tax,” the think tank said.

Without reform, higher tax rates on returns of capital – such as rent, dividends, interest, self-employment earnings or capital gains – could raise around £3bn to £4bn by 2029-2030, but will also hamper saving and investment, the Institute for Fiscal Studies estimates.

The think tank opposes restricting the tax break on pension contributions – a measure seen by others as a way to raise large sums – saying it would be difficult in practice, as well as unfair.

Instead, it is calling for reforms to broaden the VAT base – the UK allows far greater exemptions and zero-rated provisions than other countries – as well as an enforcement campaign to make sure small businesses pay the taxes they owe.

Increasing the VAT rate from 20 to 21 per cent, in breach of Labor pledges, would raise £9.9bn in 2029-30.

The IFS said the chancellor could raise £4.2bn by imposing a 1 per cent VAT on all zero-rated items.