Chancellor Rachel Reeves has received a stark warning from a prominent Wall Street bank that increasing taxes later this year will fail to enhance public finances.
Reeves is broadly anticipated to impose tax rises of at least £20bn during this year's Autumn Budget, with property holders, gambling firms and pension funds expected to face steeper charges, as reported by .
Goldman Sachs has stated the º£½ÇÊÓƵ has achieved "limited historical success" in strengthening public finances through tax increases, with bond dealers and economists likely to remain concerned about Britain's fiscal strategy well beyond the Autumn Budget.
The bank's economist Sven Jari Stehn warned that additional taxes would probably maintain elevated interest rates for an extended period due to persistent inflation, which would consequently increase the government's borrowing expenses.
Jari Stehn also noted that opposition to proposed benefit reductions earlier this year demonstrated that expenditure cuts remain "politically difficult to deliver."
"The historical record shows that growth tends to hold up better following spending cuts than revenue increases," Jari Stehn said. "Research suggests that spending cuts can have positive supply-side effects when focused on improving incentives to work – for example, via welfare reform. Given the large increase in the number of workers who have dropped out of the º£½ÇÊÓƵ labour force to receive long-term sick and disability benefits, welfare reform could be expected to boost labour supply as well as lowering spending."
"As a result, the OBR would probably score such reforms highly in terms of their supply-side effects."
Reeves should make ‘reliable’ tax changes
He also supported Reeves' fiscal rules despite mounting criticism of the Office for Budget Responsibility (OBR)'s "orthodoxy", with Reform º£½ÇÊÓƵ stating they would scrap the watchdog if elected to government.
However, shifting forecasts to an annual occurrence "would be beneficial," according to Jari Stehn.
Jari Stehn said: "Research suggests that maintaining the fiscal rules would help keep policy focused on deficit reduction, thus containing gilt market pressures.
"The government would benefit from additional headroom such that small shocks do not trigger immediate fiscal action. Moreover, it would be helpful for the OBR to assess compliance with the rules only once a year to de-emphasise the headroom in the public debate."
The Goldman Sachs economist also encouraged the government to avoid implementing major alterations to taxes which produce smaller revenue amounts and instead choose to make minor adjustments to larger revenue generators. This would probably compel Labour to abandon manifesto pledges not to increase income tax, VAT or employees' national insurance, which constitute more than two thirds of total government revenue.
"If tax rate increases are necessary to generate revenue, small increases in tax rates that affect a broad tax base – for example, on income or property – tend to deliver a more reliable increase in tax receipts than large rate increases on a small revenue base – for example, on non-doms or gambling activity."
