Strategies for the Chancellor to Raise £20 Billion in Tax Revenue

As the UK approaches a critical Budget announcement on 30 October, Chancellor Rachel Reeves is tasked with generating an additional £20 billion in tax revenue to address a significant shortfall in public finances. This figure stems from an unanticipated overspend of £22 billion identified since her arrival at No. 11 Downing Street in July. With borrowing off the table for day-to-day expenses, Reeves must explore alternative avenues for raising funds.

Understanding the Challenge

The need for £20 billion is somewhat arbitrary, as it does not directly correlate with current overspend figures but highlights the necessity for sustainable fiscal measures moving forward. The upcoming Budget may unveil new economic forecasts and projections that could shift priorities and strategies.

Potential Tax Increases

Traditionally, the most substantial sources of tax revenue include income tax, VAT, National Insurance, and corporation tax—collectively accounting for about two-thirds of government revenue. However, during her election campaign, Reeves committed to not increasing these major taxes, which significantly limits her options.

Reversing Previous Cuts

One immediate option could be reversing recent tax cuts, specifically the reduction in National Insurance introduced by the previous Conservative government. This move alone could potentially recover a significant portion of lost revenue.

Exploring Other Avenues

While major tax increases on income and consumption have been ruled out, there are still other routes worth considering:

1. Capital Gains Tax: Adjustments to capital gains tax could yield some revenue from profits made on assets like second homes and shares. However, experts suggest this might only generate a few billion pounds rather than the full £20 billion needed.
2. Inheritance Tax: This tax impacts only wealthier individuals and currently raises less than £25 billion annually. Significant increases here would require careful consideration due to its limited base.
3. Pension Contributions: A substantial area ripe for reform is the tax treatment of pension contributions. Currently, individuals receive tax relief on contributions without incurring taxes on pension withdrawals, creating an imbalance that primarily benefits higher earners. Reevaluating this system could provide a considerable source of revenue—potentially up to £50 billion annually.

Approaches to Taxation

When considering how to raise these funds, two main strategies emerge:

• Expedient Approach: This method focuses on quick fixes that minimize backlash from taxpayers, often involving hidden or less visible taxes.
• Economic Approach: This strategy advocates for a more equitable and logical taxation system that avoids penalizing specific activities or income types disproportionately.

Looking Ahead

Chancellor Reeves must decide whether to implement immediate tax increases or introduce long-term reforms that gradually enhance revenue over time. The decision will likely reflect broader economic principles and political considerations.

Conclusion

While raising £20 billion may seem daunting, it represents a manageable challenge in historical context—equivalent to about £6 per person per week or maintaining NHS funding for approximately 40 days each year. As we await further details from the Budget announcement on 30 October, it will be crucial to assess which strategies are employed and how they align with both fiscal responsibility and public sentiment.