British Finance Minister Faces Need for Major Tax Rise

By David Milliken
LONDON (Reuters) – British finance minister Rachel Reeves may need to announce a £25 billion ($33 billion) tax rise in her first budget on Oct. 30 to help shore up public services such as prisons and police, according to the non-partisan Institute for Fiscal Studies (IFS).

Labour outlined £9 billion of tax increases during its election campaign, but the IFS suggests that larger tax hikes will be necessary to prevent government budgets from shrinking as a share of the economy.

"The new chancellor is committed to increasing investment spending and funding public services. To do this, she will need to increase taxes, borrowing, or both," said IFS Director Paul Johnson.

The proposed £25 billion tax increase would account for almost 1% of national income and be nearly twice as large as tax increases following the last two significant changes in government in 2010 and 1997.

Despite Labour's landslide election victory in July, Reeves noted that public finances are in a much worse state than expected. Prime Minister Keir Starmer's approval ratings have also plummeted, partly due to cuts in winter fuel subsidies for pensioners.

"We have inherited a tough financial position, but we won't let the challenges of the past define our future," a finance ministry spokesperson commented after the IFS forecast.

Reeves intends to modify the budget rules to aim for a balanced budget, excluding investment, rather than allowing a 3% deficit overall. However, the definition of public debt is also under review, which the IFS estimates could permit an additional £50 billion in borrowing.

Benjamin Nabarro, chief UK economist at U.S. bank Citi, expressed "material concern" among foreign bond investors about potential changes to rules that may allow for significantly more debt.

On Monday, the yield premium offered by 30-year British government bonds over German debt reached its highest since former prime minister Liz Truss' budget plans unsettled markets in 2022.

"After the recent market dislocation just two years ago, international investors are not really willing to give the gilt market the benefit of the doubt," Nabarro noted.

Last week, Reeves indicated that there would be "guardrails" surrounding any additional borrowing.

"Having a very robust process of policing … is also crucial in assuring gilt markets that this isn't just being used as a piggy bank," Nabarro added.

($1 = 0.7652 pounds)