Andy Burnham, the newly appointed Prime Minister and Labour MP for Makerfield, faces calls to increase income tax as part of addressing a looming £24 billion shortfall in the government’s spending plans. The National Institute of Economic and Social Research (NIESR), a respected economic think tank, has warned that the government must either raise taxes or identify significant budget savings across departments by the end of the decade.
Failure to find additional funding could result in real-terms cuts to essential public services, including hospitals and schools. Stephen Millard, deputy director of NIESR, advocates for raising income tax as the most suitable method to finance public spending, despite this contradicting the current Labour manifesto commitments.
“Corporation tax in particular has a negative effect on growth. Increases in VAT have effects on expenditure and demand, so you probably don’t want to be increasing that at a time when demand is possibly weakening anyway. And, of course, VAT is highly regressive, it affects poorer people much more,” Millard explained. He added that while increases in income tax might have some impact on growth, these effects tend to be minimal.
Although Mr Burnham remains committed to upholding the Labour manifesto, he is confronted with the challenges of funding significant reforms in social care. According to estimates from HM Revenue and Customs (HMRC), even a one percentage point increase in income tax rates could generate substantial additional revenue. Raising the basic 20 per cent tax rate to 21 per cent could bring in an extra £8 billion, while increasing the 40 per cent rate to 41 per cent might yield £2 billion more. A modest rise from 45 per cent to 46 per cent could add a further £230 million.
A Treasury spokesperson commented: “We are determined to support the Bank of England in achieving its inflation target. Fiscal discipline is the bedrock of economic stability and national security. That is why we will meet our fiscal rules, while continuing to invest in the public services people rely on.”