Tax Increases in the United Kingdom: Challenges for the New Finance Minister

British Finance Minister Rachel Reeves faces the challenge of potentially announcing a £25 billion tax increase in her first budget on October 30. This measure may be necessary to secure key public services such as the prison system and police, according to the nonpartisan Institute for Fiscal Studies (IFS). Although the Labour Party had planned for £9 billion in tax increases during its election campaign, the IFS emphasizes that much larger increases are needed to keep the government budget stable relative to the economy. Paul Johnson, Director of the IFS, highlights that higher taxes, increased borrowing, or a combination of both are essential to ensure investments in the public service sector. Since Labour's stunning election victory in July, Reeves has had to acknowledge that public finances are far worse than feared. The decline in popularity of Prime Minister Keir Starmer is partly due to cuts in heating subsidies for pensioners. Nevertheless, the Treasury promises not to be defined by past challenges and aims for balanced budget management. New definitions for public debt are currently being examined, which, according to the IFS, could allow for an additional £50 billion in borrowing. However, this causes concern among international bond investors. Benjamin Nabarro, Chief Economist for the UK at the US bank Citi, notes that the markets remain skeptical after the turbulence in 2022. Reeves recently emphasized that any additional debt will be surrounded by "guardrails" to ensure the stability of British government bonds. A stable process for monitoring borrowing is crucial to prevent the bond markets from being used as a "piggy bank.