Government Cash Buffer May Have Halved; Potential Funding Options Explored

BBC UK reported that the government's cash buffer, which serves to assist in meeting fiscal rules and decreasing borrowing, might have been cut in half over the preceding six months, falling from around £24bn to as low as £11bn. This reduction is partly attributed to the rising interest rates the government has been paying to borrow money from private investors.

John Healey, the Chancellor, might need to find additional money to restore this buffer, which would indicate whether the government's plan to lower borrowing by the end of this Parliament remains on track. Concurrently, he faces pressure to secure funds to aid people facing the rising cost of living and to finance defense spending. However, Labour's 2024 election manifesto committed to not increasing income tax, VAT, or National Insurance rates.

Government sources have ruled out options such as increasing taxes on capital gains or extending the mansion tax. BBC Verify examined other potential avenues for the Chancellor to raise revenue, external, on Wednesday.

One possibility is to increase taxes on banks. UK banks have seen their profits rise recently because they have been able to charge higher interest rates when borrowing. There is a widespread belief among bank executives that the Chancellor is planning to raise taxes on banks in this week's Budget. Tax Policy Associates, a think tank, estimates that increasing the surcharge on corporation tax for banks from 3% to 5.5% could potentially generate an extra £1bn to £2bn annually for the Treasury. Such a higher tax would initially decrease the profits banks distribute to shareholders. Some of these shareholders are wealthy investors. Banks have cautioned that additional taxes might discourage them from investing in the UK, external, which could lead to job reductions. Furthermore, ordinary savers could be indirectly impacted if their pension investments include bank shares, external, according to research.

Another suggested measure is higher taxes on gambling machines. Former Prime Minister Gordon Brown has urged Healey to increase the tax on electronic gaming machines, such as those found in betting shops and adult gaming centers that can offer payouts of £500 per game, citing the social harm caused by problem gambling. The Social Market Foundation (SMF) think tank estimated that doubling the tax on these machines from 20% to 40% could raise between £275m and £460m, depending on consumer reaction. Individuals using gambling machines might also see the tax passed on through worse game odds, although anti-gambling groups suggest this could help deter more people from using them. SMF research indicated that gambling machines are increasingly concentrated in some of the UK's most deprived high streets, and that one in four people who play casino games on these machines gamble at risky or harmful levels. The gambling industry has argued that a tax increase could cause betting shops, which own and operate the machines, to close due to reduced profitability. It has also contended that betting shop closures might decrease the money bookmakers contribute to horse racing, potentially endangering jobs in that sector.

Reports suggest the Chancellor is preparing to announce that major online marketplaces, including Amazon, Ebay, and Temu, will become responsible for collecting tax owed by retailers selling on their platforms. The Treasury estimates it is missing out on approximately £12bn per year in VAT revenues that should be paid by companies, which it terms the "VAT tax gap." Tax experts note that a portion of this issue, though not accounting for the full £12bn of the VAT gap, is that some online sellers do not comply with VAT rules, either by not charging VAT when required or by failing to remit collected VAT to the government. Enforcement is difficult because some firms using platforms like Amazon to sell products are based abroad and falsely claim to be UK-established businesses. Others close and reopen under different company names to evade tax obligations. Reports indicate that making large online marketplaces responsible for collecting this tax, instead of individual retailers, could curb this type of tax evasion and potentially generate around £1bn in extra VAT annually. Amazon, which supports this measure, has estimated it could bring in £700m a year in VAT for the government. Some sellers might respond by increasing prices or leaving the platform, which could affect some consumers. Nevertheless, this change would level the playing field for online sellers, ensuring that businesses charging VAT are not illegally undercut by those who violate the rules and do not charge it.

Combining the aforementioned three tax measures would yield a maximum of only about £3.5bn annually. This amount is relatively small compared to the sums the Chancellor might need to restore his buffer and fund any new expenditures. Prime Minister Andy Burnham stated in the summer that he desired a "fair and lasting" reduction to the UK's welfare bill, while the government faces pressure from opposition parties to find savings from working-age benefits. The Conservatives assert they could achieve savings of £36bn per year by limiting people's access to welfare payments. Reform claims they could save £50bn yearly in this manner, although independent analysts question the feasibility of such substantial savings. Working health and sickness benefits have risen sharply since the Covid pandemic, and the Office for Budget Responsibility projects the overall cost will increase from £68bn this year to £81bn in 2031. Keir Starmer and Rachel Reeves had attempted to reduce spending on these benefits by £5bn per year by 2030, but they were forced to reverse this course following a revolt by backbench Labour MPs. Independent welfare experts and economists suggest that savings from the working-age welfare budget are possible, but they would likely necessitate upfront spending to assist people in finding employment, which could negate any near-term savings for the Treasury. Cuts to health and disability welfare would decrease the incomes of individuals currently receiving those payments, external, and/or those who would receive them in the future—and campaigners warn of the danger of people falling into poverty. However, if more welfare claimants were supported into work, their overall incomes could be maintained or even increase.