Stealth Taxes to Meet Defence Spending Demands

Chancellor Rachel Reeves may introduce stealth taxes to shore up public finances while allocating additional funds for defence spending. Sanjay Raja, an economist at Deutsche Bank, estimates that she would need £15 billion extra to increase the defence budget to 2.5% of GDP from over 2% currently.

Between £5 billion and £10 billion could be raised by reducing funds for other departments, such as justice, local government, and the environment. Alternatively, Reeves could consider raising stealth taxes by extending the fiscal drag to fund a larger defence budget. This measure would generate £8 billion to £10 billion per year for the Treasury.

Consequences of Stealth Taxes

Stealth taxes are often implemented without being explicitly announced, which can lead to increased income tax liability or higher tax brackets for individuals without commensurate wage growth. The current freeze on income tax thresholds is set to end in April 2028.

Alternative Options

Other options available to Reeves include borrowing more for military equipment since this counts as investment spending and is permitted under her fiscal rules. Ed Balls, a former Labour shadow chancellor, believes Reeves should explore abandoning the borrowing rules for defence.

Treasury's Non-Negotiable Rules

However, Chief Secretary to the Treasury, Darren Jones, has emphasized that the government's fiscal rules are "non-negotiable." He stressed that they will not "play fast and loose with the public finances."

Impact on Market Confidence

The prospect of stealth taxes has had a "chilling impact on confidence, hiring, and investment," according to economist Julian Jessop of the Institute of Economic Affairs.

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