Thinktanks from across the political spectrum are urging Rachel Reeves to use this month’s budget to overhaul the “broken” tax system, including abolishing stamp duty and merging income tax and national insurance.
The group, which ranges from the rightwing Adam Smith Institute to the leftwing New Economics Foundation, published proposals for sweeping “pro-growth reforms” the chancellor could introduce to “tax all income from work equally”.
A separate report on Wednesday from the National Institute of Economic and Social Research (NIESR) urged Reeves to make “brave choices” and look for an extraordinary £50bn of spending cuts and tax rises to triple the size of her fiscal buffer.
The chancellor left the door open to the first rise in the basic rate of income tax for 50 years in a speech on Tuesday and the thinktank coalition called on her to prioritise reforming the tax system in her 26 November budget, as well as raising additional revenue.
The signatories, which include the Institute for Public Policy Research and the Joseph Rowntree Foundation, argued the tax system contained “many arbitrary and nonsensical rules” and was partly to blame for sluggish productivity.
“The UK’s tax code is riddled with inconsistencies and distortions that discourage investment, penalise work and hold back productivity,” said Arun Advani, director of CenTax, which coordinated the report.
“The upcoming budget is an opportunity for the chancellor to look at the tax system as a whole and ensure that whatever the total tax take, any changes are also serving her growth mission.”
The signatories suggested reforming council tax, basing the rate on latest house values, and lowering the headline rate of VAT, while applying the tax to more types of spending.
Reeves is facing a spending gap, with the independent Office for Budget Responsibility expected to revise down its estimate for trend productivity growth, potentially blowing her £20bn off course.
She must also compensate for the £7bn cost of two big U-turns since the spring statement, on the winter fuel allowance and welfare reforms. And she intends to significantly increase the headroom against her fiscal rules.
In its report, the NIESR argued that Reeves should grasp the nettle at the budget to build up as much as a £30bn buffer against her rules.
The thinktank said that although factors such as stubbornly high inflation and interest rates were expected to ease, Reeves should urgently address public debt levels, including by increasing the basic rate of income tax.
“The trajectory of UK public debt is becoming unsustainable. Five years on from the pandemic, this is the moment to reverse that drift and start bringing debt down,” said David Aikman, director of the NIESR. “Without a credible plan to reduce debt over this parliament, the UK risks locking in a permanently higher – and potentially unstable – debt ratio.”
According to the institute’s forecasts, the chancellor is on course to miss her first fiscal rule – to match day-to-day spending with tax receipts – by £38bn. That is a £3bn narrower gap than at its last projection in August.
The institute expects the OBR forecasts to show a smaller deterioration, of £10bn-£20bn, and suggests that offsetting this shortfall, as well as building up a £30bn fiscal buffer, would require a package of spending cuts and tax rises at the budget worth £50bn.
