Fairness first: How the budget can make life better and the economy stronger

We do not recommend borrowing to fund the fiscal gap. To do so, the chancellor would need to change her fiscal rules. IPPR’s work on fiscal rules was influential in recommending changes the chancellor made to her fiscal rules at the last budget. However, we argue that changing fiscal rules at this point would be counter-productive, since it could result in market jitters and higher debt interest repayments. Signalling to the markets that the UK’s fiscal rules are strong and in-tact will be an important element of the balancing act required at this budget. 

Government must double down on ‘fairness’ and demonstrate that it has exhausted taxes at the top-end before asking working people to contribute more. People must be able to see that the wealthy have been asked to shoulder the burden too. 

In raising taxes, the chancellor can make the tax system fairer and more growth friendly 

The chancellor would undoubtedly prefer not to have to raise taxes, but given that she does, her task is to turn this into an opportunity. The UK tax system is dysfunctional – this provides an opening for reform that can support growth and improve the system, but also raise revenue. We detailed pro-growth reforms that can tackle tax inefficiency in a recent report with major think tanks from across the political spectrum.

Building on these insights, our key recommendations are as follows.

• Reform the UK’s regressive, outdated property taxation: IPPR has recommended the chancellor make steps towards a more proportional property tax system. Immediate reform could double council tax for properties in band H (worth over approximately £1.5 million) and increase bands F and G by 50 per cent (worth over approximately £770,000). This would raise approximately £3.9 billion and could be used to fund a council tax cut for 80 per cent of households. The government should also announce a full revaluation and a proportional property tax by the end of parliament, which would be a major policy achievement.
• Reform and equalize capital gains tax: Capital gains tax (CGT) is set at a far lower level than income tax – this gives investors a preferential tax rate compared to ordinary workers. CGT is also a way for the better off to avoid income tax. Redesigning this unfair and inefficient system could in fact support growth, if combined with the introduction of an ‘investment allowance’ – a design favored by Tory chancellor Nigel Lawson. It would be a tax cut for the majority of those with capital gains. The reform would include a ‘settle-up tax’ to ensure those that leave the UK pay what they owe and close the ‘uplift at death’ loophole. These reforms would allow for the CGT rate to be equalised with income tax and could raise as much as £13 billion. Our proposed CGT reform could increase overall investment by 4.6 per cent compared to a ‘no reform’ scenario.
• Levy national insurance contributions on landlords and partnerships – who are currently exempt from making the same contributions as ordinary employees. There is little economic justification for this, creating inefficient inequity and distortions. Asking partnership businesses (such as law or accounting firms) to pay NICs could raise £1.9 billion. Levying NICs on landlords rental income could raise £3 billion, and allowing mortgage interest deduction could preserve investment incentives.
• Smooth out income-tax cliff edges for higher earners by tapering allowances and charges more gradually. This would end unfair spikes where modest pay rises can trigger marginal tax rates of 60 to 70 per cent, restoring fairness and strengthening incentives to work. Some reforms such as slowing the child benefit taper, could be inexpensive.

The government should also take action on unfair profits. These policies target revenue raising from corporations associated with social harm (gambling) and those benefitting from flawed policy design (the Bank of England’s flawed quantitative easing design).

• Increase gambling tax: A tax on the harmful, profitable gambling industry, largely targeted at online gambling and slot machines. We estimate it could raise £3.2 billion a year.
• End the £22 billion taxpayer losses at the Bank of England, which are an international outlier. IPPR has proposed doing this via a combination of a reserves income levy and stopping the bank’s active quantitative tightening programme.  A second best way could be to move to a system of deferred losses, used by the European Central Bank and US Federal Reserve. We estimate it will save between £5 and 8 billion against the current budget rule. 

Our proposed taxes do not target high earners, who already contribute a significant share of the UK’s tax take. Instead they focus on areas where many wealthy people benefit from preferential tax rates.

Broader based taxes may be required to cushion a larger fiscal package

These targeted tax reforms can raise substantial revenue. However, they might not be sufficient if the OBR downgrade is more significant. In this case, some broad-based taxes will have to increase. 

This could be done via freezing income tax thresholds for an additional two years (raising £7.5 billion). 

If further revenue is needed, we think there is some scope for raising income tax rates, including the basic rate. Swapping a 2p income tax increase with a reduction of 2p NICs (raising £6 billion) could also be justified.

Effective income tax rates are at historically low levels for average earners and the UK is middle of the pack when compared to other advanced nations tax take.

While there is an electoral cost to raising taxes that were promised to remain unchanged, this may be the chancellor’s least bad option in the medium term. Our public opinion work shows that for many voters the electoral cost of raising taxes is lower than the penalty for visibly failing on core priorities such as the NHS, energy bills, or child poverty. This is especially true among Labour’s 2024 voters, who gave the government a mandate to rebuild Britain’s crumbling public realm.

Growth benefits

The negative short-term, demand-side impact of rising taxes (if not matched by higher spending) will be significant, especially if taxes are focused on labour income – our package avoids this pitfall. Our tax package leans largely on ‘narrow’ taxes. This approach would protect working people’s income, which would protect aggregate demand and thus growth. 

Our recommendations are targeted to improve tax system efficiency and focus on the supply side. This is in line with optimal tax theory that suggests cutting taxes on ‘marginal investments’ and increasing taxes on rent. Moreover, our suggestion to smooth out cliff edges for higher earners and limited increases of income tax mean that high earners are not over-taxed in international comparison. 

A package that is popular with the public, as we suggest ours would be, and the government’s backbench MPs would carry an economic benefit – it could give markets confidence that the changes will ‘stick’, strengthening credibility.

This cannot be a budget for a black hole: Announce a ‘war on bills’

Our research shows that people will be unlikely to support tax rises without a purpose. Integral to the success of the budget will be the chancellor’s ability to tell a convincing story about the future – she will need to persuade people that their lives will get better. 

In a separate piece, we argued that action on cost of living will be crucial for this. The budget offers an opportunity to announce a high profile ‘war on bills’ – this can position the government as on the side of working people; doing all they can to ease high costs. This should be a multi-year set of policies, which could be funded by a modest amount of extra money raised at the budget – including lowering energy bills and cutting council tax for most households. 

What matters is that people can see and feel the difference. Announcing a set of visible, practical steps under a clear story about rebuilding living standards won’t fix everything overnight, but it would show that the government is fighting in people’s corner. The government should also finally abolish the two-child limit – a crucial cost-of-living support for millions of families.

Five key tests for the budget 

In summary, the budget should be judged against five tests.

1. Exhaust taxes on those with the broadest shoulders before asking working people to contribute more. This will mean that any package, even one that increases broad-based taxes, will need to include a substantial package of taxes on targeting unfair advantages for the wealthy and unfair profits. The chancellor will face an uphill battle with the public if she opens the spending envelope only to leave dysfunctional, unfair taxes on wealth unchecked.
2. Protect public services. Attempting cuts to meet the fiscal gap would damage essential progress on public service reform and public service improvement remains high on the public’s expectations of a Labour government, and is essential to repair the foundations of society and the economy after the damage of austerity.
3. Take action on the cost of living. Convincing people that life will get better under this government will be essential to win support for tax rises. The government should use the budget to announce a ‘war on bills’, to demonstrate they are on working people’s side and that increased contribution will amount to better living standards.
4. Stabilise the economic situation. Expanding headroom is essential for the government politically and will be a powerful signal to the market and business investors.
5. Drive better and fairer growth. Show that the government is serious about building a stronger economy by using tax reform to tackle long-standing inefficiencies, unlock investment and boost productivity.

An unenviable task awaits the chancellor on 26 November. But with a carefully balanced package, the budget can set a pathway to a fairer, growing economy – something the country eagerly awaits.