Increase Taxes to Fund Spending, New U.K. Chancellor Urged

(Bloomberg) -- U.K. Chancellor of the Exchequer Rishi Sunak should raise taxes to fund his spending plans and avoid breaking another set of fiscal rules, according to a leading think tank.

In an analysis published Wednesday, the Institute for Fiscal Studies cast doubt on whether a government commitment to balance the day-to-day budget in three years would be met on existing plans.

That leaves the new chancellor with tough choices as he prepares for his first budget on March 11: hit departments that have borne the brunt of austerity with further real-terms spending cuts beyond next year; increase taxes; or relax the budget rules he inherited from his predecessor, Sajid Javid.

Jettisoning the balanced-budget target would make it the shortest-lived of any of the 16 fiscal rules announced over the past decade, damaging Britain’s reputation for budget discipline in the eyes of investors, the IFS said. The target doesn’t include investment spending, which can increase by around 20 billion pounds ($26 billion) a year under the current framework.

Spending was already set to rise strongly even before Javid resigned as chancellor after losing a power struggle with prime Minister Boris Johnson over who controls the economy. His replacement by Sunak has fueled speculation about an even bigger fiscal loosening.

Tax Hikes

The IFS said changing the fiscal rules would see debt start to rise, taking it to unsustainable levels above 80% of GDP. Instead, it urged Sunak to follow chancellors since 1992, who have raised taxes by 13 billion pounds ($17 billion) on average in the first year of the parliamentary term.

Sunak’s first budget will “set the direction of policy for the next five years,” said IFS Director Paul Johnson. “If this new government is going to make radical change to taxes and spending this surely is the time to do it.”

A prime target should be abolishing entrepreneurs’ relief, which costs the Treasury 2.3 billion pounds a year but benefits just 5,000 individuals, the IFS said. It also urged the government to increase council-tax charges on more expensive homes and end the “ludicrously generous” tax treatment of capital gains at death and of inherited pension pots.

Restricting tax relief on pension contributions to the basic 20% rate would raise more than 11 billion pounds but increase bills on people with incomes above 50,000 pounds, for whom Johnson promised tax cuts before becoming prime minister. The government may also face opposition if it ended the freeze on fuel duty, which is set to cost the Treasury 4 billion pounds a year by the end of the current parliament.

To contact the reporter on this story: Andrew Atkinson in London at a.atkinson@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Stuart Biggs

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