UK needs big tax rises to avoid second Liz Truss episode, think-tank says

By David Milliken

LONDON (Reuters) -British finance minister Rachel Reeves needs to embark on major tax rises in her November 26 budget or risk a repeat of the loss of market confidence that cost former prime minister Liz Truss her job, a leading think-tank said on Wednesday.

The National Institute of Economic and Social Research said Reeves should build 30 billion pounds ($40 billion) of margin for error against economic shocks, up from 10 billion at her last budget.

Combined with a likely 20-30-billion pound downgrade to Britain's fiscal outlook by the government's Office for Budget Responsibility, that makes a fiscal consolidation of 50 billion pounds necessary, it added.

As Reeves had set out long-term spending plans in June, the bulk of this would need to come from tax rises.

"It's a vital message that all the MPs (members of parliament) need to understand, that a large adjustment needs to happen on the fiscal side," NIESR director David Aikman said.

"The risk is that markets react badly to whatever comes out in the budget later this month and..., rather than the credibility dividend we could see happening, we see the opposite of that, something more like the Liz Truss moment," he told reporters.

TRUSS BUDGET TRIGGERED SPIKE IN GOVERNMENT BORROWING COSTS

Reeves has repeatedly contrasted her approach with that of Truss, whose Conservative government's unfunded plans for tax cuts announced in September 2022 triggered a surge in government borrowing costs that required the Bank of England to step in.

While British long-term borrowing costs fell to a seven-month low on Tuesday, over the past year they have been sensitive to concerns that Reeves only aims to meet her budget goals by a narrow margin and could be knocked off course by economic shocks.

In a speech on Tuesday, Reeves - whose centre-left Labour Party came to power in July 2024 - renewed her criticism of the Conservatives' economic legacy, saying "we will all have to contribute" at her next budget.

Speculation has been widespread in British media and financial markets that Reeves is preparing to break Labour's pre-election promise not to raise income tax.

A 50-billion-pound tax rise would require a 5 percentage point increase in income tax rates, which have not risen for most British workers since the 1970s.

NIESR's estimate of the size of Britain's fiscal hole, and the amount of headroom Reeves should build against future shocks, is at the top end of economists' forecasts.

($1 = 0.7451 pounds)

(Reporting by David MillikenEditing by Gareth Jones)