Reeves to hit wealthy and cut ISA allowance – Daily Business

Rachel Reeves is expected to hike taxes on the wealthy and cut the ISA allowance despite better news on the economy.

Official figures this morning shows gross domestic product grew by 0.1% in August after flatlining in July, keeping the UK on track as one of the fastest-growing major economies this year.

However, the Chancellor still faces a growing gap in the public finances. She has rejected a wealth tax but raising capital gains tax, a raid on banks or levying national insurance on rental income have not been ruled out.

There is speculation that she will cut the tax-free allowance on individual savings accounts (ISAs) from £20,000 to £10,000. 

The Institute for Fiscal Studies estimates that the Chancellor will need to make up £22 billion deficit following policy U-turns and weaker growth than she forecast.

The IFS said Ms Reeves will “almost certainly” have to raise taxes in her budget on 26 November IFS director Helen Miller said the position the Chancellor finds herself in was “to a large extent, a situation of her own making”.

Speaking to Sky News on Wednesday, Ms Reeves gave the strongest indication to date that she is planning to raise taxes in the Budget.

In an interview with The Guardian, she said: “Last year, when we ­announced things like [removing tax exemptions for] non-doms, like the [tax increase for] private equity, like the VAT on private school fees, there was so much bleating that it wasn’t going to raise the money, that people would leave. The OBR will publish updated numbers on all of those things. And that scaremongering didn’t pay off, because … people want to live here.”

The IFS’s green budget, funded by the Nuffield Foundation and produced in association with Barclays, says Ms Reeves could raise tens of billions of pounds a year more in revenue without breaking manifesto promises.

During last year’s election, Labour said they would “not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT” – which the IFS flags as the simplest ways to raise revenue.

Ms Miller said: “Last autumn, the Chancellor confidently pronounced that she wouldn’t be coming back with more tax rises; she almost certainly will.

“For Rachel Reeves, the Budget will feel like groundhog day. This is, to a large extent, a situation of her own making. When choosing to operate her fiscal rules with such teeny tiny headroom, Ms Reeves would have known that run-of-the-mill forecast changes could easily blow her off course.

“A key challenge is ensuring that fiscal groundhog day doesn’t become a twice-yearly ritual. There is a strong case for the Chancellor to build more headroom against her fiscal rules.

“That wouldn’t be costless – but nor is limping from one forecast to the next under constant speculation that policy will be tightened again.

“Persistent uncertainty is damaging to the economic outlook. And constant obsession with the headroom distracts from important debates and challenges, such as how government policy could bolster economic growth, how the tax system should be reformed, and how public services can be delivered more effectively. Devoting more time and attention to those questions would be better for us all.”

Jack Meaning, chief UK economist at Barclays, said: “The Chancellor faces a difficult economic backdrop as she prepares for the upcoming budget.

“Growth is slowing, unemployment is rising, and inflation remains above both the Bank of England’s 2% target and comparable rates among our international peers. Against this backdrop, the Chancellor must find a fiscal consolidation to satisfy her own fiscal rules, without derailing the growth agenda or losing the confidence of the markets.

“If the Chancellor can avoid delivering an inflationary Budget, headline price growth should ease significantly in the coming months, allowing the Bank of England to cut interest rates further and support households and businesses in driving more balanced economic growth.

“If the Chancellor can continue to prioritise productivity, the UK will be better positioned to achieve sustainable medium-term growth and deliver meaningful improvements in living standards.

“The path to these outcomes is narrow and beset with risks on both sides. Global markets, along with households and businesses across the UK, will be watching closely on 26 November and hoping the Chancellor finds the right track.”

Mark Franks, director of welfare at the Nuffield Foundation, said: “The choices the government makes in the upcoming Budget will have implications that go far beyond issues of fiscal arithmetic.

“They will directly affect people’s lives, their well-being, and the resilience of public services over the years ahead. The fragile state of the economy and the public finances makes it even more important to think long-term, act strategically, and put people at the heart of fiscal policy.”