IFS Warns Rachel Reeves Against ‘Half-Baked Dash for Revenue’

Thinktank Urges Caution as Chancellor Faces £30bn Budget Gap

The Institute for Fiscal Studies (IFS) has warned Chancellor Rachel Reeves to avoid what it called a “half-baked dash for revenue” as she prepares next month’s budget, cautioning that rushed or fragmented tax hikes could harm economic growth.

The influential thinktank said that while Reeves could raise billions without breaking Labour’s manifesto pledges, doing so through poorly designed or uncoordinated tax measures risked creating “unnecessary economic damage.”

Risks of Poorly Designed Tax Increases
In an advance chapter of its upcoming Green Budget report, the IFS noted that higher rates on inefficient taxes could undermine incentives to work and invest, while also reducing productivity. “A budget focused purely on the politics could prove considerably worse on the economics,” the report warned.

The IFS said the chancellor faced a difficult balance boosting revenues to fill a gap of £20–30 billion while maintaining fiscal credibility and avoiding damage to the economy.

Fiscal Pressures Mounting
Reeves has ruled out increasing income tax, national insurance, and VAT three of the UK’s largest sources of revenue leaving her with limited options. With borrowing costs still elevated and public opposition to spending cuts growing, the Treasury is under pressure to find alternative ways to close the deficit.

The chancellor also aims to double her current £10 billion budget buffer to about £20 billion, providing greater flexibility to manage shocks to the public finances.

Potential Revenue Sources Identified

According to the IFS, the UK is “in a fiscal bind” but could still generate significant funds through reforms to taxes on savings and investments, including rental and dividend income, interest, self-employment profits, and capital gains.

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The thinktank’s researchers proposed several measures, such as imposing national insurance on employer pension contributions and capping retirees’ ability to withdraw 25 percent of their pension tax-free. “Employer [national insurance contributions] could be levied in full on all employer pension contributions and replaced with a 10% subsidy on all employer pension contributions. This would raise around £6bn a year,” the report said.

Closing the Corporate Tax Gap
The IFS also pointed to a potential £10 billion windfall from addressing what it described as a growing “tax gap,” particularly among small businesses. It estimated that small firms were currently paying only 40 percent of the tax they owed.

“In 2029–30 terms, a corporation tax gap of that size would represent more than £24bn of forgone revenue; just returning the gap to 2017–18 levels could raise more than £10bn,” the report added.

Economic and Political Challenges for Reeves
With the government’s fiscal rules restricting new borrowing, the chancellor faces limited room to maneuver. At the same time, Labour MPs have resisted attempts to cut welfare or public service funding, forcing the Treasury to rely more heavily on tax reforms.

The upcoming budget is widely viewed as a key moment for Reeves and Prime Minister Keir Starmer’s government after a turbulent first 15 months in office. Economists have said that the decisions taken next month could determine whether the government can maintain stability while supporting growth.

Call for Strategic Tax Reform
Isaac Delestre, senior research economist at the IFS and co-author of the report, said any attempt to raise revenue should be guided by long-term structural reform, not short-term fixes. “Revenue-raising seems likely to be a major goal of the coming budget,” he said. “But if Rachel Reeves limits her ambition to collecting more revenue, she will have fallen short.”

“Almost any package of tax rises is likely to weigh on growth, but by tackling some of the inefficiency and unfairness in our existing tax system, the chancellor could limit the economic damage. The last thing we need in November is directionless tinkering and half-baked fixes,” Delestre added.

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