Chancellor Rachel Reeves is preparing for one of the biggest UK budget presentations in years, with the challenge of closing a £40 billion funding gap.
Economic pressures, such as inflation and slow growth, have placed the country’s public finances under intense scrutiny.
The question now is whether to fill the deficit we will resort to new taxes or cuts to public services.
Can new taxes solve the £40 billion deficit?
The £40 billion gap is a consequence of earlier concerns about a £22 billion deficit.
Given the fragility of the economy, Reeves’ proposals will have far-reaching effects on government departments, businesses and citizens.
While concerns about tax rises are considerable, Labour’s manifesto ruled out increases in income tax, national insurance and VAT, leaving limited options for raising the necessary funds.
One possible solution is to increase employers’ social security contributions.
Although the Labor Party has ruled out any increase for employees, Reeves has indicated a willingness to impose additional NI costs on companies.
This could involve increasing the current National Insurance rate on salaries (currently at 13.8%) or introducing a National Insurance on employer pension contributions of around 2%.
An increase in IN related to pension contributions could generate between £17 and £22 billion, while a 1% increase in salaries could generate a further £8.5 billion.
Together, these measures could close a significant portion of the funding gap without directly impacting individual taxpayers.
Will the increase in fuel excise duty help generate £4 billion?
Another possibility is a long-overdue increase in the excise tax on fuel. Frozen for more than a decade, this tax could be revisited, particularly as fuel prices fall.
A 10 pence per liter increase could generate revenues of between £4 billion and £5 billion, although the shift to electric vehicles and the planned phase-out of petrol and diesel cars by 2035 would limit revenues in the long term.
Capital gains tax (CGT) could also be reviewed, with a focus on aligning taxes on unearned wealth (such as dividends) with income tax rates.
Currently, CGT rates are lower than income tax rates (20% for capital gains and 24% for property).
Rising CGT rates could generate around £6 billion a year. However, the Labor Party has been cautious about raising taxes on second properties, fearing this could discourage property transactions.
Another area Reeves could focus on is inheritance tax reform, with possible changes aimed at redistributing wealth.
While such adjustments could generate an estimated £3 billion to £5 billion, critics warn they could discourage investment and have wider economic implications.
Public reaction to these potential tax increases remains mixed. Many are worried about their finances amid economic uncertainty.
The opposition is likely to use the budget to criticize the government’s approach, questioning the fairness of further financial burdens after years of austerity.
The stakes are high as the budget approaches. The outcome will not only determine the UK’s immediate financial future, but could also shape the political landscape for years to come.
How Reeves manages the £40 billion gap, whilst balancing public sentiment and economic pressures, will be closely watched.
