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To fill the black hole in the UK’s finances, the Chancellor, Rachel Reeves, might need to break Labour’s manifesto promises in the Autumn Budget, say leading audit, tax and business advisory firm, Blick Rothenberg.
Some economists are saying that the fiscal “black hole” could be as big as £50 billion and Reeves could be about to raise National Insurance Contributions (NIC) from 2% to 3%.
Robert Salter, a Director at the firm, said, “If the fiscal ‘black hole’ is as big as the £50bn some economists are suggesting, the Government will need to break some of its election promises unless it is willing to break its ‘fiscal rules’ by additional borrowing.
“Although this would be against the Labour Party manifesto commitment, employee and self-employed National Insurance Contributions (NICs), could be increased, potentially back to the 12% rate which applied before it was cut by Jeremy Hunt as Chancellor.
Per Treasury estimates, a 1p (1%) rise in the basic rate of employee NICs would raise £5.35bn. Overall, pushing the core rate of NICs back to 12% would raise about £21bn. Alternatively, a 1p (1%) raise in the supplementary rate of employee NIC, which is an increase from 2% to 3%, would raise around £2bn.
“Another option is to extend the freeze on tax rate bands and tax thresholds until at least April 2029; the tax bands are ready frozen until April ’28. This would be quite easy to do politically, as in many cases, the changes won’t be noticed by taxpayers.
“This wouldn’t strictly break Labour’s election promises, as it isn’t a tax rise, but it would drag more ‘ordinary working people’ into paying tax or paying higher rates of tax.”
He added: “However, the Government will still need to increase the rates of the ‘core taxes’ such as income tax and Value Added Tax (VAT), if the black hole is as big as some economists have suggested.
“A 4p increase in the basic rate of income tax, so a rise to 24%, would increase Revenues by ca. £28bn – £30bn. The Chancellor could introduce a 1% or 2% increase on standard rate of VAT or perhaps reintroduce multiple rates of VAT so that less of the tax increase pain falls on ‘ordinary working people.’
“But a rise in the rate of VAT will increase inflation in the month it is applied and in the subsequent 11 months following that. This may have an impact on the speed at which the Bank of England are willing and able to drop interest rates, which are critical for government expenditure and economic confidence across for both individuals and businesses.
“Increasing fuel duty is an obvious choice for Rachel Reeves. Successive governments have not increased the duty for mainly political reasons. But it is easy to collect and there is not as much justification for a freeze on fuel duty when employment taxes, which clearly stunt economic growth, have increased.
“Another option is to increase the tax rates for 40% and 45% taxpayers, but this would not substantively reduce the Government’s fiscal black hole.
“A 1p increase in the 40% tax rate is only estimated to bring in ca. £1.4bn, whilst a 2p rise in the 45% tax rate only brings in potentially £250m – £300m.
“Despite the obvious political downsides for Labour of walking back their election promises it would help to fill the fiscal ‘black hole.’ The alternative would likely be making drastic expenditure cuts and being seen as an austerity Government by the public or increasing Government borrowing and ‘going back’ on their previously announced financial rules.”
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