Chancellor Rachel Reeves will need to raise taxes by £20bn if she wants to “end austerity,” according to the Resolution Foundation.
The think tank said that to fulfil this pledge, the chancellor must reverse upcoming cuts to “unprotected” departments such as local government, justice, and the Home Office, which were planned by former chancellor Jeremy Hunt. Achieving this would require at least £21bn in extra day-to-day public service spending by 2029-30.
“Around £20bn of tax rises would be needed to end austerity while meeting the current balance rule — a level of tax rises that would reflect the norm for post-election budgets over the past 20 years,” the Resolution Foundation noted.
Read more: UK households face £25bn in tax hikes for Reeves to keep pledges
The think tank added that one of the chancellor’s challenges is that these new tax rises would be on top of approximately £20bn in planned tax increases inherited from her predecessor, set to take effect during the parliament.
Raising the £20bn could involve measures such as abolishing inheritance tax reliefs, increasing capital gains tax rates, and applying national insurance contributions to employer pension plans, the Resolution Foundation said. Additionally, the chancellor could consider reversing key welfare cuts from the previous government, including the freezing of Local Housing Allowance rates and the two-child limit on support, which would cost around £3bn.
Despite these challenges, the think tank’s report said there were some positive news for the chancellor regarding the economy. Higher growth and inflation — occurring without significantly increased interest rates and debt servicing costs — are expected to boost tax receipts, potentially reducing borrowing by £16bn annually by the end of the forecast.
While these tax and spending decisions are central to any budget, the chancellor’s aim to deliver a pro-investment budget could mark a shift from recent fiscal policies. The report highlighted that the chancellor has inherited plans to reduce public investment from 2.4% to 1.7% of GDP by 2028-29. Maintaining investment at the higher level would require an additional £30bn in annual capital expenditure by the end of the parliament.
Such a level of investment would be “impossible to achieve” under the current debt rule without drastic cuts to public services or even larger tax increases. Instead, the chancellor has indicated she may consider amending the fiscal rules to allow for greater investment flexibility.
The Resolution Foundation said potential adjustments could include incorporating Bank of England liabilities, which could create an additional £15bn of headroom, and excluding the National Wealth Fund and GB Energy from calculations, facilitating further infrastructure investment.
The Resolution Foundation said that if the government seeks a new fiscal rule to capture the benefits of public investment, it should adopt a Public Sector Net Worth rule. This approach could provide over £50bn of additional investment capacity if the chancellor targets an improvement in net worth in the final year of the forecast.
Read more: Chancellor Reeves urged to change fiscal rules in budget to unlock £57bn
James Smith, research director at the Resolution Foundation, said: “Rachel Reeves has expressed a desire to use her first budget to enhance investment and spur growth.
“However, this commendable goal is overshadowed by a dire outlook for public finances. The strain on services — from court backlogs to overcrowded prisons — demands a reversal of inherited austerity plans, which will cost over £20bn. While such tax increases may generate negative headlines, they are consistent with post-election norms.
“The budget should set a new direction for the parliament, featuring a long-term, large-scale capital investment program enabled by a revised fiscal rule that accounts for both the costs and benefits of investment.
“While the short-term reaction may involve concerns about tax increases and borrowing, the long-term benefits of revitalised public services, new infrastructure, and stronger growth are essential for improving living standards in Britain.”
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