Broadly Speaking
How does the Government plug Britain's £40 billion black hole?
According to the National Institute of Economic and Social Research (NIESR), “substantial adjustments in the Autumn Budget will be needed to meet the ‘stability rule’.” In plainer, more worrying words, the Chancellor Rachel Reeves will have to hike taxes in October’s budget to make up for a £40 billion deficit.
You may be wondering: why doesn’t the Chancellor simply relax those rules? While they are self-imposed, most economists believe that anything more than minor tweaks could trigger a market backlash. The lessons of recent history are still fresh, and few scenarios are more alarming than a repeat of Liz Truss’s mini-budget — an event it’s hard to describe without using the qualifier “disastrous.”
You may also wonder why Reeves doesn’t simply cut spending. Whatever your view of austerity, the recent U-turn on the winter fuel allowance suggests there is little appetite for a repeat of 2010–2019, when public spending fell from about 45% to around 39% of GDP.
So how does the Government plug that £40 billion gap?
One thing’s for sure – it can’t be on the backs of Britain’s entrepreneurs. Not just because it would be wrong, but because it wouldn’t generate nearly enough tax revenue. The pips are well-and-truly squeaking for those who have already made it, while many of those nearer the start of their journey would be minded to either leave the country or shift ambitions away from entrepreneurship.
NIESR rightly argues that Labour needs to spread the pain with broad-based tax changes. The two obvious contenders are income tax and VAT. NIESR estimates that a 5p rise in the pound on both the basic and higher rates of income tax would close the gap. However, Tom Clougherty makes a more compelling case for broadening the VAT base instead, while compensating lower-income households and introducing pro-growth tax cuts.
As Tom notes, taxes on consumption generally do less harm to long-term growth than taxes on earnings. There is also a clear opportunity to redesign VAT so it raises substantially more revenue while becoming more efficient and less distortive.
By global standards, Britain’s VAT system is unusually narrow. A mix of exemptions, zero-rating, reduced rates, and a comparatively high registration threshold means that only Italy and Romania have a smaller effective VAT base within Europe. The OECD’s VAT Revenue Ratio (VRR) — which measures actual VAT receipts against what could be collected if the standard rate applied to all consumption — puts the UK at 48.3%. For comparison, New Zealand’s broad-based VAT achieves a VRR of 99.2%. If the UK matched that breadth, Tom calculates it could bring in around £150 billion more in 2029–30.
As Tom also argues, one way to make such a reform politically and socially workable would be to use part of the extra revenue to shield lower-income households from the change. For instance, allocating roughly £75 billion to a universal flat-rate “prebate” for all adults could offset the burden on the bottom income quintiles. Another £50 billion could help meet fiscal rules, leaving around £25 billion for further pro-growth tax changes. This approach would combine a stronger revenue base with fairer distribution and space for broader reform.
On one hand, this may sound radical. On the other, it is very much in line with what eminently orthodox voices such as the Institute for Fiscal Studies have been advocating for decades. And more importantly, what’s the alternative?
Shooting Stars
Last year, I attended an event hosted by Lord Kamall of Edmonton and Purple Shoots in the House of Lords. Purple Shoots is a not‑for‑profit microfinance organisation, and the Founder Karen Davies is doing incredible work helping people escape poverty through entrepreneurship. On the day, we heard from people who had benefited from their support.
It provides small, affordable business loans, typically £500-£3,000, mainly to individuals excluded from mainstream lenders – many of whom are unemployed, on benefits, or facing other barriers
In their own words:
“Many of society’s problems have their roots in poverty and insufficient income. By enabling people to create an independent income we are tackling many other issues such as economic inactivity, poor mental health, indebtedness, child poverty, and re-offending, at their cause, creating sustainable change.”
Let me know if you would like me to make an introduction to Karen.
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Best wishes,
Philip
Philip Salter
Founder
The Entrepreneurs Network
Especially child poverty !