Council tax bills may rise by an inflation-busting 5% next year, leading economists are warning.
The Institute for Fiscal Studies stressed that Chancellor Rachel Reeves may decide in her Budget to allow town halls to keep ramping up council tax by 5% a year, despite inflation falling to around two per cent.
IFS director Paul Johnson explained that the Government had boxed itself in for its fiscal plans by ruling out increasing income tax, VAT or National Insurance, the three main revenue raisers for the Treasury.
He believes Ms Reeves will relax her fiscal rules, to allow the Government to borrow more to investment without breaching them, and also make “a range of quite complicated changes to a range of small taxes” to raise billions more to improve public services.
Sir Keir Starmer has not ruled out increasing National Insurance paid by employers, with No10 arguing the Government’s commitment was not to hike taxes on “working people”.
But Mr Johnson believes such a hike would be a “very clear breach” of Labour’s manifesto.
The document states: “We will ensure taxes on working people are kept as low as possible. Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.”
On council tax, the Government could relax the rules which currently limit most rises to 5%, including 2% for adult social care, and a referendum needed to go above the overall level.
Mr Johnson told Times Radio: “Council tax at the moment is broadly due to go up by something like five per cent and councils are capped in what they can do there.
“It’s possible that the Government will decide to give councils more freedom or even keep at that five per cent level.
“If you kept it at five per cent in the years going forward, of course, that will be significantly higher than inflation which over the last couple of years it has not been.”
He stressed that local government had been “really struggling” in recent years, with “pressures” on social care, special educational needs and homelessness.
He argued for more central government funding for town halls.
As the Government had ruled out increases to the “big taxes,” he added, it would have to look at smaller ones which are “much more complicated and often easier to game” to avoid paying.
The Treasury was reported to be modelling increasing capital gains tax to between 33% and 39%.
But Mr Johnson stressed CGT, which raises about £15 billion a year, was paid by less than one per cent of the population, and two thirds of it came from some 12,000 people.
“If all you do is increase the rate, you will get a lot of behavioural change,” he added, with people seeking to avoid paying more.
He emphasised that CGT needed “serious reform” and warned if the Treasury did it rapidly it could make “a mess” of it.
He added: “We are either going to see some very, very tight spending plans or the junking of manifesto pledges on fiscal rules and borrowing, or finding some way of increasing taxes.”
If the Government increases employer National Insurance, it would be a “very, very clear manifesto breach,” he argued, though that might be a better way of raising money that other proposals being considered.
While the economy is growing, with GDP up 0.2% in August, Mr Johnson stressed: “The problem for the Chancellor is that this does not seem to be reflected in the public finance numbers.
“Tax revenues are not coming in especially strongly and spending is ahead of planned, so her borrowing numbers probably are not going to look that great.”
The IFS says Ms Reeves may need to raise up to £25 billion from tax increases if she wants to keep spending rising with national income.
Cabinet Office minister Pat McFadden stressed the Budget would aim to fix the public finances and boost investment in Britain.
