Professor Richard McManus explains the pitfalls and potential broken promises that lie ahead of the autumn budget, arguing for a reformed, simpler, sustainable and fairer tax system.  

Much has been made of the upcoming budget on the 30^th of October, Labour’s first since the aftermath of the financial crisis. The debate has largely centred on the £22bn public finance black hole and election pledges. Historically, governments often break election promises in the hope that they can be more generous later, closer to the next election. Yet beyond the politics of these promises lies a more complex dilemma: how Labour can reconcile its tax and spend policies with a fundamentally unsustainable fiscal structure.

Both Labour and the Conservatives avoided hard truths during the campaign. There was little appetite for acknowledging that future tax hikes and/or spending cuts would be inevitable. The perception, I imagine, is that the electorate would punish honesty when it involves austerity. That is, any party who was more honest of the fiscal situation would lose votes, that talks of future tax rises would be quoted back to them by their opponents. So, Labour finds itself navigating a precarious position: it has promised not to raise taxes on “working people,” but by ruling out some options, it has narrowed its flexibility in other areas.

The heart of the issue, however, is not merely the broken promises or the fiscal black hole, it’s the overall structure of our tax system. Were we to start the whole thing again, no one would design the current tax system from scratch. This is as true for spending as it is for taxation, but the latter reveals the bigger absurdities.

Each quirk of the tax code can be justified in isolation, but the patchwork results in baffling contradictions. Take, for example, the separation of income tax and national insurance. It was sensible once yet remains an odd relic today. Capital gains tax and taxes inflationary gains, essentially taxing you for your asset’s value rising in line with general prices. Property taxes are worse; council tax is based on property values from decades ago, while stamp duty locks people into their homes, stifling geographic mobility. These are just a few of the many quirks that leave the system cumbersome, outdated, and often nonsensical.

So, what should we do from here? It’s easy to critique the system, to point out what’s wrong. Yet, there are no easy answers. This is not merely an economic question but a political one, as well. I would argue that the best starting point is to lay out some general principles – a framework for what an ideal tax structure should look like. Rather than trying to fix every flaw overnight, we should evaluate every proposed change against this ideal, gradually aligning the system over time. Instead of layering complexity upon complexity in a misguided effort to correct previous errors, we should be striving for simplicity.

Sadly, political calculations are likely to override these ideals in this month’s budget. Take, for example, the leaked proposal to increase National Insurance contributions from employers. The idea that this won’t affect working people is highly questionable. Businesses don’t absorb these costs in isolation—they get passed on in ways that ultimately impact workers and consumers. Employers facing higher NI contributions are likely to respond in three predictable ways: by holding back on wage increases, by cutting back on employment, and by raising prices to offset their increased costs. This creates a ripple effect that disproportionately impacts lower-income households, who already spend a greater share of their earnings on essentials.

Moreover, with Labour’s pledges limiting their flexibility – especially with the commitment not to raise income taxes – there are few options left but to squeeze spending or borrow more. Yet borrowing carries its own risks, particularly in an environment where debt servicing costs are growing, limiting room for manoeuvre. Rachel Reeves may find herself in a fiscal bind, where either increasing taxes or slashing spending could risk breaking election promises. And while there’s talk of tweaking debt rules to free up borrowing for investment, this is no free lunch. Shifting the goalposts of fiscal responsibility may buy some time, but without careful investment, it risks becoming another short-term fix to a long-term problem.

Ultimately, as we head into the 30th October budget, the tension between political expediency and sound economic reform will be on full display. The real challenge lies in moving beyond political patchwork and setting the foundation for a tax system that balances fairness, simplicity, and long-term sustainability.

Richard McManus is Professor of Economics in Christ Church Business School.