Chancellor should raise taxes not cut spending to meet fiscal rules – think tank

The Chancellor should increase taxes instead of cutting welfare to balance the books when she delivers her spring statement at the end of the month, a leading think tank has said.

Rachel Reeves is set to update her fiscal plans on March 26 against the background of a faltering economy and drastically reduced headroom against the debt rules she set herself in October.

According to a report from the Resolution Foundation published on Monday, she will need to find around £4.4 billion to meet her target of ensuring day-to-day spending is paid for with tax rather than borrowing, thanks to a combination of weak growth and higher interest rates.

Two options for achieving that aim are imposing deeper cuts on Government departments, or cutting disability and sickness benefits – something she is reported to be considering.

But the Resolution Foundation urged her to look at raising taxes instead, saying extending the freeze on personal tax thresholds for another two years would raise £8 billion.

Continuing to rule out tax rises is going to make future budgets even more challenging to deliver

The think tank added this would also avoid harming living standards in the short term, as thresholds are already frozen until 2028, and mean 80% of the extra revenue came from the richest half of households.

Conversely, the report said raising the threshold for qualifying for personal independence payment (PIP), the main disability benefit, would raise £5 billion but focus cuts on the poorest half of families.

James Smith, research director at the Resolution Foundation, said: “The Chancellor must act decisively to meet her fiscal rules. But with the jobs market in recession territory, lower income households shouldn’t bear the brunt of any consolidation.

“Crucially, she should avoid turning the spring statement into a ‘sticking plaster’ budget, with long-term thinking on welfare reform undermined by the quest for short-term savings that could cause real harm.

“And with Britain’s fiscal pressures more likely to intensify rather than fade away, continuing to rule out tax rises is going to make future budgets even more challenging to deliver.”

During the election, Sir Keir Starmer spoke out against what he called “sticking plaster politics” that had seen government focus too much on short-term solutions to long-term problems.

But Labour also promised not to increase taxes on “working people”, specifically income tax, national insurance or VAT.

The Chancellor also chose to use her budget in October last year to confirm that the freeze on personal tax thresholds, introduced under the Conservatives in 2021, would end as schedule in 2028, saying extending it would “hurt working people”.

She added: “I am keeping every single promise on tax that I made in our manifesto.”