Taxes will have to increase after the March Budget if the government plans to honour the spending plans in outlined last year, the Institute for Fiscal Studies (IFS) has warned.
This comes as chancellor Rishi Sunak – who replaced Sajid Javid on 13 February – finalises policy proposals ahead of delivering his first Budget after just 27 days in office.
The IFS has labelled Sunak’s Budget as “the most significant fiscal event in years” and said the new government would struggle to deliver on its promises without hiking taxes.
Reports have continued to circulate about a potential cut to pensions tax relief for high earners from 40% to 20% to “equalise” the system – a proposal which has faced strong Conservative opposition.
IFS director Paul Johnson said: “This Budget will set the direction of policy for the next five years and if this new government is going to make radical changes to taxes and spending, surely this is the time to do it.”
While the state of that proposal remains unknown in the wake of Javid’s resignation, Johnson said there are better options to improve taxation than to cut contribution relief.
“The chancellor is hemmed in by a rising deficit and fiscal targets set out in the conservative manifesto. They will allow him to increase investment spending, which will be welcome if well-targeted, but they will not allow substantial increases in current spending, or tax cuts, to be funded by more borrowing,” he said.
“We have already had 16 fiscal targets in a decade, and fiscal targets should not just be for Christmas [and] Sunak should resist the temptation to announce another and instead recognise that more spending must require more tax.”
As an alternative, the IFS’ Budget preview suggests the reduction of the pensions tax-free lump sum.
The economic think-tank said the government should consider that “plenty of tax rises” remain, raising revenue from better-off individuals and improving “the coherence of the tax system”.
The IFS said: “Restricting pensions tax relief to the basic rate would increase the income tax bills of precisely the group (those with annual incomes of £50,000 and over) for whom Boris Johnson pledged income tax cuts prior to becoming prime minister.
“Continuing to freeze fuel duty would cost another £4bn a year (in today’s terms) by the end of the parliament, on top of the £6bn a year that real-terms reductions since 2010 are already costing.”