Economists say the Chancellor has agreed to many expensive funding commitments, including extra defence spending and an increase of public sector pay.
Bee Boileau, a research economist at think tank the Institute of Fiscal Studies (IFS), said the Government faces “some unavoidably tough choices, particularly after turning on the spending taps last autumn”.
Fiscal rules to be tweaked?
Susannah Streeter, head of money and markets at DIY investment group Hargreaves Lansdown, said the Chancellor might “tweak her fiscal reporting rules” to give herself more headroom.
The International Monetary Fund (IMF) has suggested that these could be refined in several ways. At present, the Government cannot borrow to fund day-to-day spending and must ensure that debt falls as a share of the economy by 2029/30.
The IMF suggested that switching to one annual forecast from the independent Office for Budget Responsibility (OBR) rather than two, or establishing a “formal process” to allow for “small” breaches of the rules, could give more space.
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Streeter said this could be the “escape route from being forced into a big retreat from the election pledge not to raise income taxes”.
Otherwise, many people are bracing themselves for big tax rises in autumn.
Tax hikes and benefit cuts
Experts say taxes could rise to fill any gap that opens up in the finances, while there may be changes to current rules on pensions and other savings to increase revenue.
These include the possibility of restricting salary sacrifice pension schemes, which save National Insurance for employers and employees contributing to pension schemes.
Caroline Harwood, head of employment tax at accountancy and business advisory firm BDO, said the Chancellor could be interested in reviewing these reliefs after a recent HMRC paper on this.
She said: “Previous Chancellors have shied away from taking this ‘low-hanging fruit’ because of the furore that changes to pensions tax causes – and because saving for retirement has generally been seen as something to encourage.
“Employees currently using Benefit in Kind incentives through salary sacrifice schemes could also lose out if the current incentives were reduced. This could have a particularly big impact on those taking advantage of such schemes to lease electric vehicles – another arrangement previously encouraged in the context of the path to net zero.”
Streeter said other options include freezing income tax thresholds for longer, until 2030, on the grounds that this is not a tax rise. Inheritance tax and dividend tax could also be in the frame again, with the possibility of tweaking the ‘seven-year rule’ that means any gifts are tax-exempt if you live longer than this after making them.
“Instead of making multiple tweaks, the Government might consider the option of U-turning on its election pledges, and make a small change to a big tax – like income tax, National Insurance or VAT. This would be politically incredibly difficult, but the Government might decide in a world with no good options, it could be worth the backlash in order to put the finances on a firmer footing,” Streeter added.
