Rachel Reeves will need to hike taxes by up to £25 billion to meet Labour’s spending commitments and avoid a return to austerity, according to a leading think-tank.
The Institute for Fiscal Studies issued its grim warning as the chancellor prepares to deliver her first Budget on October 30.
At the Labour conference in Liverpool last month, Reeves declared: “There will be no return to austerity. Conservative austerity was a destructive choice for our public services – and for investment and growth too.”
But in their latest report, the IFS said public spending cuts will only be avoided if the chancellor imposes huge tax rises.
The think-tank acknowledged that Labour has inherited “an unenviable public finance situation” from the Conservatives.
“Taxes are at a historic high and yet debt is high, rising and only barely forecast to decline in five years’ time, while many public services are showing obvious signs of strain,” the IFS said.
Reeves will need to find around £30 billion by 2028-29 to fund pay settlements for public sector workers and avoid future spending cuts, their report said.
They added: “If she wants to keep spending rising with national income, she could need up to a total of £25 billion of tax increases.
“Given the pledges she has made not to raise the main rates of income tax and corporation tax, or to increase national insurance or VAT at all, she might struggle to implement a tax rise on that scale.
“It would be bigger than the net tax rises implemented in July 1997 and October 2010 (both around £13–14 billion). In which case she might have to live with day-to-day spending on many public services falling as a fraction of national income.”
On BBC Breakfast this morning, business secretary Jonathan Reynolds said: “The IFS are right to say what we’ve inherited is unenviable, they are right to say the previous government’s sums didn’t add up, so that’s a challenge as you come in having to reconcile that situation.
“But of course we will stick to those manifesto commitments, and of course the chancellor has been absolutely clear she will put forward a Budget for growth.
“That means, first of all, seriousness with the public finances that has not beed present for the last few years, and it means there’s money for longer term investment, not raiding that money for short-term revenue budgets. That is what she will put forward.”
A Treasury spokesman said: “It’s right to say that we have inherited a tough financial position, but we won’t let the challenges of the past define our future. Despite uncovering a £22 billion black hole in our public finances, we are focused on making this the most pro-growth Treasury in history.”