SerpApi.Org
Taxes must rise to pay for Andy Burnham’s costly policy blitz, the City has warned.
Economists said that John Healey, the Chancellor, may have to “significantly” raise taxes to pay for all the promises being made by the new Prime Minister.
Mr Burnham has already announced an “unfunded” VAT cut to electricity bills and has capped bus fares at £2. He has also promised to fix social care and take further measures to ease living costs.
The Prime Minister said on Wednesday that he would also “look at” lifting the £12,570 income tax threshold in the Budget, after indicating the day before it was off the cards. Wes Streeting, the Defence Secretary, has also hinted that military spending will be boosted.
James Smith, the chief economist at the Resolution Foundation, said: “Depending on the price tag for all these things, then it would have to be a significantly revenue-raising Budget to pay for some of those big-ticket items.”
The promises are being made against a darkening economic outlook, which is eroding the Government’s budget headroom and putting pressure on Mr Healey to rebuild the fiscal buffers.
Stephen Millard, the deputy director at the National Institute of Economic and Social Research, said: “It’s not clear that the money would be there absent tax rises. To meet these commitments, taxes are going to have to go up somewhere. The question, of course, is where.”
At his first Cabinet meeting on Tuesday, Mr Burnham signalled that he wanted to find savings within Whitehall budgets to pay for cost of living-focused policies. However, economists said this would be difficult.
Andrew Wishart, at investment bank Berenberg, said: “There does seem to be a bit of naivety about finding spending cuts to pay for these things. I do think there will be some tax increases in the Budget.”
Mr Wishart speculated that the Chancellor may be forced to break the manifesto pledge not to raise income tax, employees’ National Insurance contributions or VAT.
He said capital gains tax rates were likely to be raised and the VAT registration threshold lowered in the Budget to raise new funds.
“Ultimately, I don’t think that’s going to be enough,” Mr Wishart said. “So there is a possibility that they have to try and make the argument for a broad-based tax hike to pay for, particularly, the defence spending increase.”
Tom Josephs, of the Office for Budget Responsibility, told a House of Lords committee on Tuesday that the Government’s commitment for defence spending to reach 3.5pc of GDP by 2035 was “quite a significant new pressure” on public finances.
Andrew Griffith, the shadow business secretary, said: “The last thing Britain needs is another summer of speculation on tax.
“Households and businesses are already crushed under a high tax burden. Unlike his failed predecessor, the Chancellor needs to rule out tax hikes now.”
UK government borrowing costs rose at one of the fastest rates in Europe on Wednesday, with the yield on 10-year bonds rising above 5pc. Until the war in Iran broke out, borrowing costs had not been this high since 2008.
Speculation about potential tax rises is mounting after both Mr Burnham and Mr Healey made clear they would not seek to ramp up borrowing.
Addressing Treasury staff for the first time on Tuesday, the Chancellor said “fiscal discipline” was “the bedrock of economic stability and national security”.
“We will meet the fiscal rules,” he said.
At the same time, a re-escalation of the Iran war is pushing up both energy prices and borrowing costs. This is eroding the Government’s budget headroom – the buffer it has to meet the fiscal rules.
Rachel Reeves, the former chancellor, had a margin of error of £23.6bn against her fiscal rule at the Spring Statement. However, the Resolution Foundation last week calculated it may have dropped to £10bn.
The latest decision to cut VAT on electricity bills could lower the buffer further to £8bn, if the Government were to extend the temporary relief until the end of the decade, Mr Smith warned.
That is below the £9.9bn buffer Ms Reeves left herself for her first two fiscal events, a level that was deemed insufficient and prompted near-constant speculation about tax rises.
Mr Smith said: “Ideally, you would want to restore some headroom, so we could be looking at a revenue-raising budget in the autumn.”
Mr Healey said on Tuesday that he had discussed with Mr Burnham about how to “meet the fiscal rules with a buffer against uncertainty”.
Robert Jenrick, Reform UK’s finance spokesman, said: “Burnham pretends he’s different, but he’s delivering more of the same high tax and spend agenda that has got us into this mess. Yet more tax rises are inevitable.”
Reform has previously estimated the cost of Mr Burnham’s policy promises at £38bn.
