Bosses demand Reeves launch income tax raid

Bosses say Rachel Reeves, the Chancellor, must raise taxes in her November budget if she cannot cut public spending - Jordan Pettitt/Getty Images

Rachel Reeves must increase income tax to fix the public finances and re-establish credibility in Britain’s Treasury, the Institute of Directors (IoD) has said.

In an unprecedented call for a major tax rise, the leading business group said the damage done by last year’s raid on employers combined with the Government’s inability to cut spending had left the Chancellor with little choice but to break Labour’s manifesto promise not to increase taxes on working people.

“If they politically cannot deliver spending cuts, it has got to be income tax increases,” said Anna Leach, the IoD’s chief economist.

“We are going to have to knuckle down, get the public finances actually properly stable – because they are not considered to be by markets – then go hell for leather for growth.”

It adds to the drum beat of support for a significant shift in policy from Ms Reeves. Two influential think tanks with close links to Labour have this week suggested the Chancellor should consider raising income tax.

The Resolution Foundation urged Ms Reeves to raise £6bn by shifting 2p of tax from employee National Insurance contributions onto income tax while the Institute for Government said that tax increases should “fall on those with average incomes”.

Such a move would be extremely damaging politically after Labour pledged not to raise income tax, VAT or National Insurance in its manifesto. However, experts argue that breaking one or more of these promises may now be unavoidable given the state of the public finances.

Ms Reeves is widely expected to launch a significant tax raid in November with economists warning of a hole in the public finances of between £20bn and £50bn. Spending cuts to address the problem have so far proved impossible to deliver.

Ms Leach said increasing income tax would be the least painful option to raise the level of money required.

She said: “The more it is spread out, the less bad it will be. You have to stop fiddling while the UK burns. Take a step back and have the honest conversation about what is needed, otherwise we are just going to be here every fiscal event.”

The IoD, nicknamed the bosses’ union, is a century-old business group with almost 20,000 members. They range from the biggest listed companies to SMEs.

It typically calls for lower taxation. Before last year’s Budget, the IoD warned that “public spending and taxation are respectively at postwar highs as a percentage of GDP”.

The backing for the first increase in the main rate of income tax since 1975 comes as businesses reel from the impact of the Chancellor’s last Budget, which has sparked a slump in the job market and pushed up inflation.

Story Continues

The IoD’s regular survey of bosses found confidence in the economy collapsed to record lows this year after the £25bn raid on employer National Insurance contributions kicked in. Sentiment among businesses plumbed depths not even seen in the pandemic lockdown or in the wake of Liz Truss’s mini-Budget of 2022.

Ms Leach said the Government had failed to either bolster growth or to restore stability to the public finances, instead embarking on “big tax increases on business ... [with] an inability to exercise spending restraint so far, weakening fiscal credibility”.

She called for a wholesale reset of policy at the Budget in November.

Ms Leach said: “The time when the Government could bail out everyone and sprinkle money around is past. We had crises, it did that during those. Now it is going to be difficult and it is going to be difficult for everybody.”

Raising the main and higher rates of income tax by a penny each, to 21pc and 41pc respectively, would bring in more than £10bn per year for the Exchequer. Freezing the income tax thresholds for another two years could net the Chancellor a further £7.5bn.

The pressure on public finances was highlighted by reports that the Northern Powerhouse Rail scheme is to be delayed again amid concerns over the cost of faster routes between Liverpool and Manchester.

A Treasury spokesman said: “The Chancellor makes tax policy decisions at fiscal events. We do not comment on speculation around future changes to tax policy.”

Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month with unlimited access to our award-winning website, exclusive app, money-saving offers and more.

View Comments