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chancellor A £50bn black hole in the country’s public finances would need to be plugged, with the basic rate of income tax rising by at least 2p, a leading economic think tank has warned.
The National Institute of Economic and Social Research (NISR) has further increased the fear of tax increase on November 26. Budget As he said, believe it Rachel Reeves It is on track to miss one of its fiscal terms by £38.2 billion in 2029-30.
According to the group, this is before the approximately £10 billion needed to rebuild the fiscal buffer has been depleted.
In his latest economic outlook, Neisser said he believed the UK’s independent fiscal watchdog, the Office for Budget Responsibility (OBR), would predict a smaller deficit of around £20 billion when its latest forecast is published alongside the budget.
But Neisser has called on the Chancellor to aim for a buffer of at least £30bn beyond that to help protect the finances from further shocks in the future, which would still require him to find £50bn.
It says the Chancellor would need to break his manifesto promise and raise income taxes rather than “messing around” with changes to marginal taxes, which it argues would be more damaging to the economy in the long run.
Neisser said a 2p increase on the 20% basic rate of income tax was expected to be the minimum needed to improve Britain’s poor public finances, raising about an additional £20 billion.
It said a 5p increase on the 40% higher rate would add an extra £10 billion, with a similar increase in the upper band adding around £500 million.
This will have an impact on economic growth – reducing its forecast for next year by about one percentage point to 1.1% in 2026, rising by 0.3 percentage points in the third year.
But it cautioned that the alternatives are far worse with an increase tub Passing the cost on to consumers increases inflation, while corporation tax increases “discourage investment, permanently reducing GDP”.
And if credibility is not restored to public finances, borrowing costs will remain high, while debt will reach “unsustainable” levels, Neisser said.
Stephen Millard, deputy director of macroeconomics, said Ms Reeves would need to make “bold choices”.
He said: “They would need to break their manifesto promise by raising income taxes rather than trying to fill the gap by messing around with lots of changes to marginal taxes – because that would be the least bad option for the economy.
“Getting the UK economy and public finances ‘back on track’ requires a mix of tax increases and spending cuts, which in turn will help Government Focusing on its mission to provide higher economic growth and better living standards across the country.
Ms Reeves promised in Labour’s general election manifesto not to raise taxes for working people – which broadly means income tax, VAT, Employee National Insurance contributions and corporation tax.
Instead she increased employers’ National Insurance Contributions (NICs) in last autumn’s Budget and said at the time that she would “never” repeat such a tax-increasing Budget.
But he has already set the stage for a renege on the Labor manifesto, ruling out tax rises in his pre-Budget speech on Tuesday and warning that “each of us must do our part”.
David Aikman, director of Niesr, said: “The economics are clear; what is needed now is political will – a readiness to make tough decisions on tax and spending in this Budget in the long-term interests of the UK economy.”
In its forecast, Niesr raised its growth outlook for 2025 to 1.5% from 1.3% in August, but kept its prediction for next year at 1.2%.
He believes the bank will keep interest rates at 4% this week, but cut them again in February as inflation falls to 2.7% in the second quarter of next year from the current 3.8%.