Tax rises inevitable as Budget black hole set to persist, says think tank

Most of the £22 billion budget gap identified by the new Government is set to continue, making tax rises “all but inevitable”, a think tank has said.

Discovery of the “black hole” in the weeks following July’s election led to Chancellor Rachel Reeves taking a series of what she called “difficult decisions” to close the gap, including the move to means-test winter fuel payments.

Further measures are likely to come when Ms Reeves announces her first Budget on October 30.

But in a report published on Monday, the Resolution Foundation warned that around £19 billion of the black hole was likely to persist as overspends on public sector pay and asylum costs continued over the next five years, adding to the pressure on the public finances.

In an event held to launch the report, Resolution Foundation senior economist Cara Pacitti painted a bleak picture of the challenge facing the Chancellor.

Pointing to the Government’s commitments not to return to austerity, to meet its rules on debt and borrowing, and to maintain public investment, Ms Pacitti said: “Tax rises in this Budget are all but inevitable.”

Spending plans put forward by the last government already involved a £20 billion cut to so-called “unprotected” departments – including the police, the courts, local government and transport.

This was something neither Labour nor the Conservatives were keen to address during the election campaign, but Ms Pacitti said avoiding those cuts without increasing taxes would mean breaking the Government’s promise to balance day-to-day spending with tax revenues.

She estimated that between £20 billion and £30 billion of tax increases would be required to provide £9 billion of “headroom” against that target.

The Resolution Foundation has backed changes to capital gains tax, inheritance tax and employers’ national insurance contributions as a way of raising that money, although the latter suggestion would be taken as a breach of Labour’s manifesto commitment not to raise national insurance.

On investment, Ms Pacitti said “really sharp falls” included in the previous government’s plans would need around £30 billion to redress, something that would be difficult to achieve within the current debt target.

That target, set by the previous government, requires debt being forecast to fall in five years’ time, something the Resolution Foundation projected would only happen by the “tiny margin” of £500 million.

In light of this, the think tank suggested moving to a different measure of debt, either including the Bank of England, which would add £16 billion of headroom, or other financial assets and liabilities that would add even more room.

Think tanks and economists have previously criticised the existing debt target as limiting investment in infrastructure and public services, and the Chancellor is reported to be considering a change to how the Government measures debt.

But the Opposition has warned this would amount to “fiddling” the debt rules.