(Bloomberg) -- Chancellor of the Exchequer Rachel Reeves gave the clearest sign yet that she’s poised to raise taxes in her first UK budget in October to fill a £16.4 billion ($21 billion) black hole in the public accounts that she says she inherited from the previous Conservative government.
“I think that we will have to increase taxes in the budget,” Reeves told The News Agents podcast on Tuesday. She repeated her commitment not to raise income tax, national insurance or value-added tax, but refused to rule-out increasing capital gains tax, inheritance tax and pension reform.
The chancellor’s remarks are the first time she’s conceded she’s looking at raising taxes at the budget on Oct. 30, despite Labour saying throughout this year’s election campaign that it had no plans to do so beyond increasing a few select measures.
On Monday, she began paving the way to do so with a statement in the House of Commons saying that the the Tories had bequeathed her £21.9 billion of “unfunded and undisclosed” spending commitments in the current year. She identified £5.5 billion of savings by removing winter fuel payments from 10 million pensioners and scrapping some infrastructure projects, while saying that more “difficult decisions” were coming.
Reeves Dumps Bad News to Clear Labour Path to Next Election
Nevertheless, Reeves also agreed to recommendations for above-inflation pay rises for over 5 million public sector workers recommended by independent pay review bodies, a decision that came with a £9 billion price tag. That’s led to accusations from the Tories that she’s seeking to blame them for a political decision.
“Instead of taking the difficult decisions needed to reform welfare, increase productivity and stand up to Labour’s union paymasters - the chancellor will raise taxes right across the country,” former Tory Chancellor Jeremy Hunt said in a statement. “Just as we warned, they were always planning to do this, they just didn’t have the courage to be honest about it.”
But in practice, UK governments have rarely disregarded the recommendations on public sector pay made by independent bodies, and on Monday Paul Johnson of the Institute of Fiscal Studies conceded that a large chunk of the overspend revealed by Reeves does appear to be unfunded.
Ruth Gregory, deputy chief UK economist at Capital Economics, said she expects the £16.4 billion shortfall to be filled by £10 billion of tax rises and £7 billion of extra borrowing. John Stepek, author of Bloomberg’s Money Distilled newsletter says the obvious candidates for hikes are capital gains tax, inheritance tax and pensions tax relief.
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