UK (Parliament Politics Magazine) – NIESR warns Chancellor Rachel Reeves that an income tax rise is least damaging, while VAT or corporation tax hikes risk greater economic harm.
As reported by The Independent, Chancellor Rachel Reeves faces pressure to boost government revenues ahead of today’s autumn Budget.
Economic data shows an income tax increase is “least damaging” to the economy compared with a VAT rise for the chancellor.
What did NIESR say about VAT and income tax’s impact on the UK economy?
According to the National Institute of Economic and Social Research, income tax increases are less harmful to household incomes than a higher VAT.
After reviewing income, corporation, and VAT taxes, the think tank warned that seeking extra revenue beyond these main taxes could harm households and the economy.
NIESR warned that among income tax, corporation tax, and VAT, a VAT increase would hit the UK economy hardest, cutting households’ real disposable income by nearly 3% and real GDP by almost 1% in the first year.
The think tank warned that a VAT increase would push inflation higher than other tax measures, due to its direct effect on retail prices.
The analysis found that raising corporation tax would have a smaller short-term effect but could slow the economy long-term by discouraging investment. It showed that increasing income tax would have the smallest impact, reducing GDP by 0.05% in its first year.
NIESR’s analysis assumes the government plans to raise total net annual revenue by £30 billion by 2029-30, the amount the chancellor needs to plug a forecasted gap in public finances. It suggested that raising income tax in the upcoming Budget would be the “least bad” option for Chancellor Rachel Reeves.
The think tank said raising income tax would break Labour’s manifesto pledge not to increase taxes on “working people,” a term broadly understood to include income tax, VAT, NI, and corporation tax.
The report’s authors wrote,
“We would argue that they could find other ways to raise tax revenue, but doing so would be much more distortive, harming the economy in the longer run.”
Ed Cornforth, NIESR economist and main author of the analysis, stated,
“Our analysis clearly shows that a rise in income tax is the Chancellor’s least damaging, most reliable option for putting the economy on a sustainable, secure footing.”
He said,
“VAT would put pressure on prices, an undesirable option given current inflation expectations, and additional business taxes would harm investment incentives, at a time when employer NICs have already dampened business confidence.”
Mr Cornforth added,
“Although it is politically unsavoury, avoiding raising income tax will force the Chancellor’s hand into worse options – tinkering around the edges simply won’t shift the dial.”
How did Rupert Soames react to Budget speculation and briefings?
Rupert Soames, the chairman of the Confederation of British Industry, said,
“The run into this Budget has been difficult. I used to think kite-flying was a pleasurable activity, but if I see another kite, I am going to run in the opposite direction.”
New CBI data shows retailer confidence has fallen to a 17-year low ahead of the Budget, with sentiment now compared to the 2008 financial crisis, says Mr Soames.
He said,
“When sitting around the [boardroom] table when making decisions, there is always a reason to say no. It also reflects a lot of nervousness around retailers about what is happening with consumer spending and the type of spending people are doing.”
Mr Soames added,
“It is not helpful … which is why for many years governments did not do this [long run up with kite-flying], not on the scale of this time.”
What to expect from the UK’s 2025 Budget?
Chancellor Rachel Reeves’ Budget is expected to include the following changes:
- Income tax thresholds will be frozen for another two years.
- VAT will not rise, but some energy levies will be removed.
- Rail fares and fuel duty will be frozen to ease costs.
- The national living wage will increase by 4.1%, and the youth minimum wage by 8.5%.
- Top council tax bands will be revalued, raising £400–450m.
- Inheritance tax may see capped gifts and a shorter taper rule.
- Pension lump sums will stay, but salary sacrifice schemes will face new caps.
- ISA allowances may drop to £12,000, and dividend taxes could rise.
- New taxes on electric vehicles, gambling, taxis, milkshakes, and local tourism may be introduced.