Prime Minister Andy Burnham has been warned that his government must either raise taxes or find significant savings from departmental budgets, as a £24bn hole looms in Labour's spending plans. The warning comes from the National Institute of Economic and Social Research (Niesr), a leading think tank, which said the Makerfield MP would need to find an extra £24bn by the end of the decade to maintain current spending commitments.
The £24bn Fiscal Challenge
According to Niesr, if the government does not secure additional revenue, it will have to accept real-terms cuts to planned spending on key public services such as hospitals and schools. This would directly undermine Labour's electoral promises to invest in the NHS and education.
Stephen Millard, deputy director of Niesr, has argued that increasing income tax is the most effective way to close the funding gap. He cautioned against other options, stating: "Corporation tax in particular has a negative effect on growth. Increases in VAT have effects on expenditure and demand, so you probably don't want to be increasing that at a time when demand is possibly weakening anyway. And, of course, VAT is highly regressive, it affects poorer people much more." Millard added: "Rises in income taxes do have some effect [on growth], but the effects tend to be very small."
Proposed Tax Band Increases
Despite a manifesto commitment not to raise income tax, Burnham is now considering a shake-up to fund a major overhaul of social care. HMRC estimates provide a clear picture of the potential revenue from a 1p increase across all tax bands. Raising the basic rate from 20% to 21% would generate £8bn. Increasing the higher rate from 40% to 41% would bring in £2bn, while lifting the additional rate from 45% to 46% would add £230m. Combined, these increments could raise over £10bn annually, significantly closing the fiscal gap.
Government Response and Fiscal Discipline
A Treasury spokesperson responded to the analysis, saying: "We are determined to support the Bank of England in achieving its inflation target. Fiscal discipline is the bedrock of economic stability and national security. That is why we will meet our fiscal rules, while continuing to invest in the public services people rely on." The statement did not directly address the tax hike proposals, but underscored the government's commitment to stability.
Political and Economic Implications
The pressure on Burnham comes as his government grapples with the aftermath of the pandemic and rising inflation. Breaking a manifesto pledge could trigger backlash from Labour backbenchers and voters, but failing to fund essential services could prove equally damaging. The social care reforms, a flagship policy, require substantial upfront investment, making the tax decision politically charged.
Analysts note that the proposed income tax rises are modest per band but cumulatively significant. The 1% increase on the basic rate would affect millions of workers, while higher-rate increases target the wealthiest. However, Niesr's assessment suggests that these moves would have a minimal drag on economic growth compared to alternatives.
As the government reviews its fiscal strategy, all eyes are on the upcoming budget. Burnham must balance electoral promises with the harsh realities of public finances, a challenge that will define his premiership.
