Analysing the Chancellor’s Tax Options

With tax rises likely in the upcoming Autumn Budget, this policy brief argues that the most realistic option is to look at one of the four main taxes: corporation tax, income tax, employee National Insurance Contributions (NICs) or Value Added Tax (VAT). This being the case, the rest of the brief explores the effects on the economy of raising these taxes. Using our Global Macroeconometric Model (NiGEM) this scenario compares different tax options available to the Chancellor at the forthcoming Autumn Budget. We assume that the government aims to raise total net annual revenue by £30 billion by 2029–30, in line with external forecasts of how much the Chancellor needs to raise to meet her current budget fiscal rule (the "stability rule"). The analysis suggests that a rise in the rate of income tax would appear to be the least economically damaging option available to the Chancellor at this time. Although there are risks around raising income tax rates such as a negative effect on labour supply or a larger than expected reduction in aggregate consumption, it is unlikely that, even if these risks came to pass, any other option would be better.