UK's Reeves should go big on tax increases in November, think tank says

LONDON (Reuters) -British finance minister Rachel Reeves should raise taxes by a lot in next month's budget to exit the "Groundhog Day scenario" of continuously having to find measures to patch up the public finances, a think tank said on Thursday.

The Institute for Fiscal Studies urged Reeves to stop giving herself only minimal headroom for meeting her fiscal targets which can lead to rushed policy changes.

"There is a strong case to do something big enough that you don't keep getting back into fiscal Groundhog Day," IFS director Helen Miller said. "It's sucking the life out of other things that we should be talking about such as how to get growth up."

Reeves - despite raising taxes by about 40 billion pounds ($53.45 billion) in her first budget last year - is probably 22 billion pounds off course to meet her rule that day-to-day spending is in balance with tax revenues by the end of the decade, the IFS estimated.

She must also choose how much headroom she gives herself for meeting that target. Reeves is considering enlarging the relatively small 9.9 billion-pound buffer that she has previously set, according to a Treasury official.

Reeves' options on November 26 are complicated by her promise to voters in the 2024 election that she would not raise the main rates of taxation on them.

On spending, an attempt to cut the welfare bill by 6 billion pounds a year ran into opposition within Prime Minister Keir Starmer's Labour Party and was dropped in July.

The IFS said earlier this week that Reeves should reform the taxation system to raise more money, for example by making wealth-related and property taxes more effective.

Jack Meaning, chief UK economist at Barclays whose forecasts were used by the IFS, predicted Reeves would announce measures that would not stoke inflation, but tax increases that push up prices - such as on alcohol and tobacco - could force the Bank of England to keep interest rates higher and slow the economy.

($1 = 0.7484 pounds)

(Writing by William Schomberg; editing by Suban Abdulla)