The Institute for Fiscal Studies (IFS) has urged the Chancellor to adopt a “bold” approach in the upcoming Budget to avoid potential future spending cuts and tax increases. The IFS estimates that Chancellor Rachel Reeves will need to address a £22 billion deficit in government finances, indicating that tax increases are likely necessary.
The IFS suggests that rectifying this shortfall would enable the government to maintain its £10 billion financial buffer. However, the think tank argues that there is a compelling case for increasing this buffer further. IFS Director Helen Miller emphasized that a limited financial cushion can create instability, leading to challenges in fiscal planning.
Miller warned against falling into a recurring cycle of fiscal reassessment, stating that the Chancellor’s current predicament stems largely from her own fiscal strategy, which limits her financial flexibility. She noted that maintaining such minimal headroom makes the government susceptible to forecast fluctuations that could derail fiscal plans.
The IFS highlighted several factors contributing to the government’s fiscal constraints, including rising borrowing costs, low economic growth forecasts, and prior spending commitments. Reeves is expected to find ways to bridge the £22 billion gap to comply with her stated fiscal regulations, which include commitments not to borrow for daily public spending by the end of the current parliament and to reduce government debt relative to national income by that time.
Miller also pointed out that a fixation on maintaining financial headroom could divert attention from essential discussions on economic growth policies and tax reforms. Recently, Reeves indicated a likelihood of tax increases in the forthcoming Budget. The IFS’s green budget report outlines potential financial decisions the government must undertake by November 26. The report, which is produced in collaboration with Barclays and funded by the Nuffield Foundation, suggests that Reeves could generate additional revenue without violating previous electoral pledges, though these measures may not be straightforward due to past commitments made by the Labour party.
Source: https://www.bbc.com/news/articles/cg7n8v34jvlo?at_medium=RSS&at_campaign=rss