IEA Proposes £75bn Tax Cuts and Pension Spending Restraint

Britain faces competing proposals for managing public finances ahead of the government's upcoming budget, with the Institute of Economic Affairs (IEA) advocating £75bn in tax changes and spending restraint while Chancellor John Healey prepares to reject an increase in capital gains tax. The plans, reported on October 19 and 20, 2026, highlight disagreements over how to support economic growth, reduce borrowing and distribute the tax burden.

The IEA's Alternative Budget 2026 proposes cutting taxes on employment and property transactions while extending value-added tax (VAT) to more goods and services. Separately, Healey has decided against raising capital gains tax in the budget scheduled for October 28, according to Treasury sources cited by The Guardian.

Under the IEA plan, employer National Insurance contributions would fall to a flat rate of 11.5%, saving businesses almost £21bn in 2027-28. Income tax and employee National Insurance reductions would save a worker earning the median wage £644 annually, while the combined changes would lower the total tax burden on a median-paid job by about £1,300 a year.

The proposals would abolish stamp duty in England and Northern Ireland and scrap inheritance tax from April 2027. The IEA estimates these changes would reduce government revenue by £19.2bn and £11.2bn, respectively, in 2027-28.

To offset lost revenue, the think tank proposes applying the existing 20% VAT rate to additional goods and services, including food, water and passenger transport. It forecasts that the extension would raise about £75bn in 2027-28.

The IEA also recommends tighter welfare spending controls, suspending the state pension triple lock and freezing the basic state pension for three years. Its estimates put net savings from these reforms at £11.9bn in 2027-28, increasing to £56.7bn by 2030-31.

The plan further calls for abolishing tariffs, accelerating planning decisions, scrapping compulsory electric-car sales targets and introducing a Defence Bond for stocks and shares ISAs. It would increase the annual ISA allowance from £20,000 to £50,000, with bond proceeds reserved for defense spending.

Lord Hannan, the IEA's director-general, argued that lower taxes and a different approach to public spending were necessary to support prosperity.

"Britain cannot tax its way to prosperity," said Lord Hannan, the IEA's director-general.

The IEA projects that its proposals would produce a £7.8bn current-budget surplus in 2027-28 and reduce net debt to 91.6% of gross domestic product by 2030-31. Those projections do not assume additional government revenue from faster economic growth.

Separately, Healey's decision not to increase capital gains tax follows calls from senior Labour figures, including Louise Haigh and Wes Streeting, for higher taxes on gains from assets such as shares and second homes. Treasury sources said the chancellor believes an increase could ultimately reduce revenue if wealthy individuals delay selling assets or move them abroad.

Healey outlined his approach to economic growth in a speech last month, arguing that businesses faced mounting costs from energy, regulation, planning constraints and labor. He said sustained growth was the long-term answer to pressures on companies and households.

"I recognize that the cost of business – that's energy bills, regulation burdens, planning constraints, labor costs – have grown since Covid. And I want to draw the line," Healey said.

He linked the government's economic priorities to investment and confidence in British companies.

"And whether it is the cost of business or the cost of living, the only way we deal with these in the long term is growth," Healey said.

He also described wealth creation as a central objective for government policy.

"I want to see this country as a country of wealth creation. I want our government decisions and policies to raise the levels of confidence and investment and profit in British business," Healey said.

The chancellor is expected to raise revenue from Britain's banks instead of increasing capital gains tax. The country's four largest lenders—HSBC, NatWest, Barclays and Lloyds Banking Group—generated a combined £200bn in pretax profits over the past five years, according to The Guardian.

Healey is also reported to be willing to accept a smaller fiscal headroom than the £24bn cushion his predecessor, Rachel Reeves, had established against Labour's fiscal rules at the time of the previous spring forecast. Rising UK borrowing costs, alongside increases in other major economies, have put further pressure on the government's financial position.

Conservative leader Kemi Badenoch is due to argue for spending reductions rather than further tax increases in a speech on Tuesday. Her proposed approach includes cuts to welfare spending and the civil service.

Badenoch has argued that the government should reduce borrowing by controlling expenditure and directing some savings toward deficit reduction.

"We have to stop borrowing so much. But instead of doing that, Labour are taking out loans to pay the interest on our loans," Badenoch will say.

She is expected to frame spending restraint around fairness to taxpayers, future generations and people who rely on public support.

"Cuts are never easy, but they are much easier if what you are doing is based on fairness. Fairness to taxpayers, fairness to future generations and fairness to those who really need support. Under our golden economic rule, half of the savings we have made would go to reducing the deficit," Badenoch will say.