Chancellor Healey told to raise taxes by £8 billion ahead of Budget

Delaying difficult choices by John Healey at the Budget is “not the right approach”, a prominent economic think tank has warned, as it urged the Chancellor to raise £8 billion in taxes to restore his halved fiscal buffer.

The Resolution Foundation called for the 28 October Budget to increase taxes – including on pensioners – to fill financial headroom that it predicts has dropped from £24 billion to £12 billion because of the Middle East war, while targeting support at those most affected by cost of living pressures.

James Smith, chief economist at the think tank influential upon the Labour government’s thinking, told a Tuesday briefing: “We think there’ll be a pretty chunky deterioration in the public finances.”

He warned the Treasury against its apparent strategy of postponing crucial decisions to next year’s spending review.

“The idea seems to be to sort of take this temporary hit to the public finances, which you can view as temporary if you think the war is going to be a temporary phenomenon, and say we’ll take difficult decisions in the future, we’ll not do anything all that major and have a sort of minimal fiscal event at the Budget.

“And we think that’s really not the right approach because there’s really two big challenges that we need to face head on here.”

The first should be to help families through “the difficult winter ahead”, including through support with soaring energy bills for households where no one has an income of more than 24,000, he said.

But the foundation urged the government not to extend the long-running fuel duty freeze, which it said disproportionately benefits high-income families, and to instead introduce small predictable increases.

The second priority should be rebuilding the Chancellor’s fiscal headroom – the leeway against his day-to-day spending rules – to at least £20 billion through spending restraints and around £8 billion in tax rises, the think tank said.

Its proposals include a tax switch which would see employee national insurance cut by 2p and income tax rates go up by the same amount, hitting the self-employed, landlords and pensioners with taxable income.

That measure would raise around £6 billion in 2029-30, the Resolution Foundation said.

It also recommends closing capital gains tax loopholes to raise £4 billion by ending exemptions for the owners of assets when they die or leave the UK, and charging national insurance on partnership income such as for law firm partners, which would raise another £2 billion.

Mr Smith said: “If you wanted to set out how you would actually fund that higher defence spending, the sort of switch we’ve proposed in the past of moving some tax from national insurance to income tax, increasing taxes on unearned income from not being an employee, that would be a way to make a serious dent in that.”

He added: “What we’re calling for today is a Budget that focuses up to our problems and doesn’t push everything off into the never never.”

Meanwhile, Mr Healey has ruled out bringing capital gains in line with income tax rates, according to the Financial Times.

Capital gains tax is a levy on the profits made after selling investments or assets, such as second homes or shares.

The annual amount of profit taxpayers can make before owing tax is £3,000, with anything above this taxed between 18 per cent and 24 per cent, compared with between 20 per cent and 45 per cent for income tax.

Clean energy tycoon Dale Vince, who has previously donated millions to Labour, urged ministers to equalise the taxes and backed estimates that this could raise up to £14 billion per year.

The Treasury declined to comment.