Chancellor John Healey's fiscal headroom has fallen to as little as £11bn from around £24bn six months ago, economists believe, putting pressure on him to raise money to meet government borrowing targets. The cash buffer has shrunk partly because rising interest rates have increased the cost of government borrowing from private investors. Healey must find funds while honouring Labour's election pledge not to raise income tax, VAT or National Insurance rates, and while facing demands to boost spending on defence and help people with living costs.
Reports suggest the government is preparing to raise taxes on banks as one option. Tax Policy Associates estimates that increasing the bank surcharge on corporation tax from 3 per cent to 5.5 per cent could generate between £1bn and £2bn annually for the Treasury. Banks have warned that higher taxes could deter investment in the UK and reduce jobs, while ordinary savers could be affected indirectly if their pension investments include bank shares. Banks may also pass costs to customers through lower savings rates or higher borrowing costs, research indicates.
The Chancellor is also considering hiking tax on electronic gaming machines in betting shops and adult gaming centres from 20 per cent to 40 per cent. The Social Market Foundation estimates this could raise between £275m and £460m annually, depending on how gamblers respond. The betting industry warns that shop closures could result, potentially damaging contributions to horse racing. Anti-gambling groups, however, point to research showing that one in four people using casino-style machines gamble at risky or harmful levels, with machines increasingly concentrated on deprived high streets.
Online marketplaces including Amazon, eBay and Temu are expected to be made responsible for collecting tax from retailers on their platforms. The Treasury estimates it loses around £12bn annually in VAT revenues from companies failing to comply with tax rules. Amazon supports the move and estimates it could raise £700m per year in VAT. Reports suggest the measure could generate around £1bn in extra VAT annually by tackling sellers based overseas or repeatedly closing and reopening under different company names to avoid liabilities. Some sellers might respond by raising prices or leaving platforms.
Together, these three tax measures would raise a maximum of around £3.5bn annually, which remains small compared to the sums needed to restore fiscal headroom. Welfare spending cuts represent another potential source of savings. Working health and sickness benefits have risen sharply since the Covid pandemic, with costs projected by the Office for Budget Responsibility to increase from £68bn this year to £81bn by 2031. Prime Minister Andy Burnham signalled in summer he wanted a fair reduction to the welfare bill. The Conservatives claim they could save £36bn annually from welfare restrictions, while Reform say £50bn, though independent analysts question the realism of such large savings.
For UK savers, borrowers and investors, potential bank tax rises could translate into lower savings rates and higher borrowing costs, while higher welfare restrictions could reduce incomes for current and future recipients of health and disability payments.