Plugging the multibillion-pound gap: What’s the government’s next move?

Following a series of U-turns, including the latest over its welfare bill, the government is facing a multibillion-pound gap in public finances in the run-up to the Autumn Budget.

The Independent cites data from economic think tank the National Institute of Economic and Social Research (NIESR), which found there will be a shortfall of £41.2 billion. This means, along with restoring the £9.9 billion buffer the government maintained since last year’s Budget, the chancellor will be looking to find a total of £51.1 billion by 2029/30.

This thankless task will be made more difficult as Rachel Reeves’ self-imposed borrowing rules mean that day-to-day spending must be matched by tax revenues. The government also made a manifesto pledge not to raise taxes on working people.

Adding to the challenges facing the chancellor, the BBC reports that the government’s long-term borrowing costs have now reached their highest levels since 1998.

Speculation is rife among commentators about how these difficult decisions might play out. While we won’t have any certainty until the Budget itself, here we’ve outlined some of the possibilities the government might explore to fill the fiscal black hole.

Tax increases could be on the agenda, with a series of options available to the government

Following a squeeze on departmental spending budgets, arguably the most likely way for the chancellor to plug the fiscal gap is through tax changes.

Here are nine potential scenarios and projected paths the government may follow.

1. Income Tax

According to the Guardian, the NIESR has suggested that revenue could be raised through an extension to the Income Tax freeze, currently in place until April 2028. It suggests that extending this freeze to 2030 could raise an extra £6 billion annually, as some taxpayers would be tipped into higher tax bands.

However, as a tax on working people, this would be counter to the government’s pledge.

2. National Insurance contributions (NICs)

Raising NICs could also be in the chancellor’s sights. By reversing previous cuts, she could boost the Treasury’s coffers. This would come at a political cost, however, breaking one of Labour’s manifesto promises.

3. Inheritance Tax (IHT)

IHT is also potentially under review, as changes here would help the government keep its pledge not to increase taxes for working people. The Guardian reports that this could be in the form of a cap on the lifetime gifting threshold.

Any gifts made seven years or more prior to death are generally not included in the deceased’s estate for IHT purposes. On death within three years, IHT is payable at the standard rate of 40% with “taper relief” applied on death between three and seven years.

IHT is usually payable on the value of an estate that exceeds £325,000, potentially rising to £500,000 if a property is left to children or grandchildren.

Introducing a lifetime maximum for gifting money or assets would unlock taxes from wealth, rather than income. However, given the backlash the chancellor received after cutting IHT breaks for farmers, it may not prove a popular decision with voters.

4. Capital Gains Tax (CGT)

Capital Gains Tax (CGT) on asset sales may also be in the firing line. CGT rates increased in the 2024 budget, rising to 24% for higher-rate taxpayers. One potential suggestion is to bring CGT rates in line with Income Tax rates, possibly including a top rate. The downside here is that it could be counterproductive to the government’s push for growth.

5. Tax-free pension lump sum

Professional Adviser has reported that the tax-free pension lump sum could also be under review to address the deficit.

Currently, you can usually access up to 25% of your pension as a tax-free lump sum from the age of 55 (rising to 57 from April 2028). This is limited to a maximum of £268,275. While the accessible percentage could be reduced, another option is to lower this maximum amount.

Although this can’t be discounted as an option for the chancellor, it won’t bring in quick revenue and would be highly unpopular.

We also believe the complexities of the pension system make significant reductions very difficult to implement. George Osborne as chancellor previously mooted changes to the tax treatment on pensions and then quickly backtracked in 2016 so there is a past precedent for Rachel Reeves to reflect upon.

6. Wealth tax

Another potentially controversial option is the notion of a wealth tax. This would likely be applied to all assets owned by an individual. Using 2020 research, the Guardian has estimated that a 2% annual levy could raise between £17.6 billion and £22.9 billion. However, this type of tax could be difficult and costly to introduce. It might also see the wealthiest individuals shift their assets or leave the country.

7. Stamp duty

According to the Guardian, another consideration is for the chancellor to overhaul Stamp Duty and council tax. This could be in the shape of a “national property tax”, on the sale of homes valued over £500,000, with a “local property tax” as a potential replacement for the current council tax system.

8. Refining fiscal rules

The chancellor could consider refining her fiscal rules, with Sky putting forward the argument that these rules are self-written and not part of wider regulation. However, the chancellor has doubled down several times on these rules, and backtracking would not be easy.

9. Spending cuts

These remain an option open to the government, although not an appealing one. Already forced to backtrack over its Winter Fuel Payment plans and proposed welfare reforms, spending cuts are more likely to come in the shape of government running costs. The BBC reports that the chancellor is committed to reducing these by 15% by 2030, making sweeping reductions in back-office and administrative roles.

Get in touch

There are some tough decisions ahead for the government. For now, we can only speculate until the Budget on 26 November. Individual circumstances and requirements will influence whether specific actions should be taken before Budget Day. However, it is generally better to work with what we know rather than what the noise suggests may be announced.

While we can’t influence public finances, we can help with your private finances, working with you to develop a financial plan that makes your wealth work harder.

You can email us at info@harperlees.co.uk or call 01277 350560 to find out more, and we’ll be very happy to help.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.