UK Chancellor Faces Budget Dilemma: Raising Revenue Without Raising Income Tax
With fiscal headroom shrinking, Chancellor John Healey is exploring revenue-raising options beyond traditional income tax hikes.
UK Chancellor John Healey is navigating a tight fiscal landscape as he prepares for an upcoming Budget, with a shrinking financial buffer, known as "headroom," necessitating new revenue streams. Economists estimate this buffer may have decreased from approximately £24 billion to as low as £11 billion in the past six months, largely due to increased interest payments on government borrowing.
To restore confidence in the government's plan to reduce borrowing by the end of its parliamentary term, Healey may need to bolster this fiscal headroom. Simultaneously, he faces pressure to address the rising cost of living and fund defense spending. However, the Labour party's 2024 election manifesto explicitly pledged not to increase income tax, VAT, or National Insurance rates.
Potential Revenue Streams
While previously considered options like raising capital gains taxes or extending a mansion tax have been reportedly ruled out, BBC Verify has identified several alternative avenues for the Chancellor.
Increased Taxes on Banks
UK banks have recently experienced profit growth due to higher interest rates on loans. There is a prevailing sentiment among banking industry figures that the Chancellor might increase taxes on financial institutions. The think tank Tax Policy Associates suggests that raising the bank surcharge on corporation tax from 3% to 5.5% could generate between £1 billion and £2 billion annually for the Treasury.
Higher Taxes on Gambling Machines
Former Prime Minister Gordon Brown has urged Healey to increase taxes on electronic gaming machines, particularly those found in betting shops and adult gaming centers, citing the societal damage caused by problem gambling. The Social Market Foundation (SMF) estimates that doubling the tax on these machines from 20% to 40% could raise between £275 million and £460 million per year, depending on gambler response. While this could potentially discourage use, there's also a risk of the tax being passed on to consumers through less favorable odds.
VAT Collection by Online Marketplaces
Reports indicate that the Chancellor is preparing to mandate that major online marketplaces, such as Amazon, eBay, and Temu, become responsible for collecting VAT owed by third-party retailers operating on their platforms. The Treasury estimates a significant annual loss of approximately £12 billion in VAT revenue, referred to as the "VAT tax gap," due to non-compliance by some online sellers, particularly those based overseas or operating under constantly changing company names. Experts suggest this measure could bring in around £1 billion annually by curbing tax evasion. Amazon has indicated support for the move, estimating it could generate £700 million in VAT for the government. While this could lead to price increases for some consumers or cause sellers to leave platforms, it would also create a more equitable market for compliant businesses.
Welfare Spending Reductions
Compared to the potential revenue from the aforementioned tax measures, significant cuts to welfare spending are often presented as a way to achieve larger fiscal savings. Some political figures have advocated for reductions in the welfare bill for working-age individuals. Conservative proposals suggest potential savings of £36 billion annually by limiting access to welfare payments, while Reform UK claims savings of £50 billion. However, independent analysts question the feasibility of achieving such substantial cuts. The rising cost of working-age health and sickness benefits, projected to increase from £68 billion this year to £81 billion by 2031, is a significant concern. Efforts by Labour to reduce spending in this area were previously met with internal opposition. Welfare experts note that while savings are possible, they might require initial investment in employment support programs, potentially offsetting near-term gains for the Treasury. Cuts to health and disability welfare could negatively impact recipients' incomes and potentially lead to increased poverty, although proponents argue that supporting claimants into work could maintain or improve their overall financial situation.