Britain's New Labour Government's Budget Challenges

By Suban Abdulla
LONDON (Reuters) – Britain's new Labour government may need to increase taxes by £20 billion ($26 billion) in its first budget on Oct. 30 to avoid real-terms cuts across public services, according to the Resolution Foundation.

The think tank suggested that revising budget rules to define public debt differently could allow finance minister Rachel Reeves to finance long-term investment while adhering to a pre-election commitment to reduce debt.

> "The budget should set a new course for parliament with a long-term and large-scale capital investment programme, enabled by a new fiscal rule that takes into account both the benefits and costs of that investment," stated James Smith, the Resolution Foundation's research director.

Labour should redefine debt in terms of public sector net worth, a broad measure that offsets a range of public assets against past borrowing. This redefinition could create an additional £50 billion available for investment, the think tank advised.

Smith added, "The short-term concern may be about tax increases and extra borrowing, but the long-term benefits of restored public services, new infrastructure, and stronger growth are what Britain needs."

Official figures indicated a 0.2% economic output expansion in August after two months of stagnation. However, business and consumer confidence surveys revealed lower sentiment and worries about potential tax hikes.

The Institute for Fiscal Studies earlier estimated that Reeves might need to raise taxes by £25 billion to address public service pressures exacerbated by former Prime Minister Rishi Sunak's Conservative government.

Reeves noted a £22 billion hole in public finances left by the Conservatives and acknowledged that some taxes will need to increase.

The Resolution Foundation stated Reeves could raise tax revenues by £20 billion, approximately 0.7% of GDP, by eliminating inheritance tax exemptions, raising capital gains tax, and imposing a social security levy on employer pension contributions.

Labour has committed not to raise taxes on "working people" and has ruled out increases in main rates of income tax, value-added tax, National Insurance and corporation tax, which account for about three-quarters of current tax revenue.

> ($1 = 0.7654 pounds)