Economist urges Rachel Reeves to reconsider income tax hikes

In the UK, economic pressures stemming from Donald Trump’s trade war are prompting calls for significant tax policy changes. Paul Johnson, the director of the Institute for Fiscal Studies, has warned that Rachel Reeves, the Chancellor, may need to reconsider the country's fiscal policies ahead of her upcoming budget. Amidst rising borrowing costs and a stagnant economy, Reeves is grappling with the chancellor's strict fiscal rules, which do not allow for borrowing to cover day-to-day expenses while mandating that national debt decrease as a share of income within five years. This backdrop makes it increasingly likely that revisiting long-standing tax structures could be necessary. Johnson noted that the implications of Trump's tariffs are severely impacting the UK economy, leading to concerns about sufficient governmental revenue to adhere to fiscal guidelines. He suggested that an increase in the basic income tax rate, which has remained unchanged since 1975, should be a lever considered by the Chancellor. Johnson argued that such a move would be less economically damaging than other potential solutions, such as further cuts in spending. During the previous spring statement, Reeves made cuts to welfare spending, which raised alarms about pushing more households into poverty, demonstrating the dichotomous choices she faces in fiscal management. The last substantial change to the basic income tax rate occurred under Chancellor Denis Healey in 1975 during a period of high inflation. Since then, while several other forms of taxation have been adjusted, there has been a noticeable reluctance among chancellors to raise the basic income tax. Many economists, including Johnson, are warning that as the economic landscape shifts, especially due to external pressures like trade wars, policy adaptations will become more necessary. Additionally, critics have pointed to measures such as the increase in national insurance contributions as harmful to economic growth, labeling them as a tax on jobs. This growing body of opposition highlights the complexity of fiscal policy decisions facing the current government, as they navigate a landscape of trade instability and domestic economic challenges. Overall, pressure is mounting on Reeves to make difficult financial decisions to maintain the integrity of the UK’s fiscal structure and support its vulnerable population amid rising costs and stagnation in growth.