Rachel Reeves to raise ‘stealth and sin’ taxes to cover black hole
Rachel Reeves is set to hit British consumers with extra “sin taxes”, leading forecasters have predicted, which are widely seen as regressive taxes that could hit people on lower income.
The Chancellor faces having to raise £20bn in taxes at this year’s Autumn Budget to restore her “already paltry” margin of £9.9bn in headroom, according to Pantheon Macroenomics.
Its UK economists Robert Wood and Elliott Jordan-Doak said the costs incurred from U-turns on welfare savings and lower tax receipts than expected could erode her fiscal buffer.
They said Reeves could look to sin taxes, which could include adding levies on gambling and junk food, to rebuild her buffer while a “stealth tax” by extending a freeze on income tax thresholds could help her fill an estimated £13bn fiscal hole.
Axing the two child benefit cap, which would cost around £3.2bn, and a move to pull a rabbit out of the hat at the Budget could lead to higher costs for the government.
With the backing of the progressive think tank Institute for Public Policy Research, Former Prime Minister and Chancellor Gordon Brown argued increasing levies on online casinos and slots machines to 50 per cent could get the Treasury enough to cover the costs of scrapping the cap.
Regressive taxes
Other “sin” taxes beyond gambling may include higher duties on tobacco, alcohol or sugar, as well as junk food.
The government has already moved to reduce sales of junk food by adding to red tape on supermarkets on healthy food standards.
Charities and health groups including Diabetes UK and the World Cancer Research Fund have previously called for higher levies on soft drinks and salty food.
Some duties rise with inflation but Rachel Reeves could move to raise taxes higher.
The government has also opened consultations on proposals to end the exemption from sugar taxes on milk-based drinks, suggesting that milkshakes and lattes could be subject to higher taxes.
The Institute of Economic Affairs (IEA), a free market think tank, has described sin taxes as regressive as they take a “greater share of income from the poor than from the rich in all plausible scenarios”.
Christopher Snowdon, head of lifestyle economics at the IEA, said: “The sugar tax has been such a dramatic failure that it should be repealed, not expanded.
“It has been costing consumers £300 million a year while childhood obesity rates have continued to rise.”
Tobacco companies have meanwhile argued that the existence of a tax gap worth £1.4bn between 2023 and 2024, which shows the difference between the tax paid to HMRC versus the tax that should be paid based on consumption, is evidence of a booming black market for cigarettes and tobacco.
The alternative option for Rachel Reeves would be to adjust fiscal rules by bringing forward a rule, which is set to come in 2027, that allows her to have a forecast deficit of 0.5 per cent of GDP in day-to-day government spending, according to Pantheon Macroeconomics.
This change could allow her to build £17bn in headroom but it could spook bond traders due to the impact of higher borrowing and her betrayal of “non-negotiable” rules.