Leading economists have issued a warning that an increase in VAT could "have a serious negative impact" on the 海角视频, as the chancellor considers which taxes to raise in next month's Budget to address a £30bn deficit.
The National Institute of Economic and Social Research (NIESR) has analysed that a rise in the sales levy would have the most detrimental effect of any significant tax hike, resulting in a 0.9 per cent drop in GDP in the first year following the tax implementation, as reported by .
Furthermore, a higher VAT would also escalate inflation, interest rates and unemployment more than other tax increases, thereby harming consumer spending.
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According to NIESR, a rise in corporation tax would be the second most damaging option, likely causing a 0.2 per cent hit to GDP.
"VAT is particularly damaging in the short term, but once the economy adjusts to the higher prices, real GDP stabilises," stated the NIESR report.
"Corporation tax, on the other hand, has less of a short-term impact but is more persistent and starts to drag down the economy in the longer term."
Instead, NIESR suggested that an increase in income tax would be the least harmful option for Rachel Reeves.
"Although there are risks around raising income tax rates such as a negative effect on labour supply or a larger than expected reduction in aggregate consumption, it is unlikely that, even if these risks came to pass, any other option would be better," the research concluded.
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However, the proposal would directly contradict Labour's general election manifesto, which pledged not to increase taxes on working people.
NIESR Economist Ed Cornforth stated: "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.
"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."
Alternative taxation measures
Reeves has been transparent about the strong likelihood of tax increases, though the specific format remains unclear.
Think tanks including the Institute for Government and the Resolution Foundation have pressed Labour to abandon its manifesto pledge against raising income tax, national insurance or VAT.
"The most likely answer is that one of them will have to go up, and then it's about choosing the one which is the least damaging economically," Caswell told City AM.
The Treasury might generate revenue by prolonging threshold freezes rather than directly increasing these tax rates.
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Oxford Economics calculates that extending freezes on income tax and NICs thresholds could yield £10bn.
Should Reeves honour her manifesto commitments, numerous alternative revenue-raising possibilities remain, including increases to capital gains tax or "sin" taxes such as alcohol duty. The report also suggests other potential tax increases, such as a windfall on banks (which could generate £5bn), reducing the tax-free lump-sum pension limit to £100,000 (£2bn), and extending National Insurance Contributions to Limited Liability Partnerships (£1bn).