Director Weekly  Fiscal credibility and economic growth should be absolute priorities for the government at the Budget – and that may require unpopular decisions, including on income tax

Parliament returned this week against a backdrop of largely negative economic stories. The IoD Directors’ Economic Confidence Index, which tracks business leader’s optimism about the economy’s prospects, fell to -74 in September 2025. That marks the lowest reading since the Index was introduced in July 2016.

Then this week’s ONS labour market data showed a decrease of 10,000 in payrolled employees on the month – and an increase (0.1% points) in the unemployment rate.

In the wake of that data, the IoD has called for a change in direction from government – and in our Budget submission, we set out recommendations to support the critical priorities of fiscal credibility and growth.

Our submission points out that the all the public finance risk has shouldered by business and investors. Decisions to prioritise public sector budgets – and to keep manifesto commitments on personal taxation and VAT – led to last year’s targeting of employers and investors. Add in the decision to maintain only a slim margin against the fiscal rules and the government’s difficulties in addressing the unsustainable trajectory of benefit spending, and it’s no wonder that directors are concerned about the prospect of further tax raids.

What, then, should Reeves do? Our recommendations include providing clarity on the next evolution of the fiscal rules and increasing the fiscal buffer; creating a 10-year strategy for benefit reform; improving the tax roadmap for business; making sensible reforms to the Employment Rights Bill; and accelerating meaningful and responsible technology diffusion, with clear governance.

Given the need to raise significant revenue in the short term, we also recommend that the Chancellor should include income tax in the tax mix.

Controversial as this may be, this is likely to be the least-bad option: simulations by NIESR indicate that, of the main taxes, income tax is least damaging to growth. A penny on the lower income tax band could yield £8 billion at a stroke; adding it to the higher band might deliver between £2 billion and £3 billion.

By contrast, raising corporation tax would damage the supply side of the economy by hitting investment – while VAT hits both demand and supply, and risks entrenching higher inflation, as well as discouraging investment.

In the end, the goal is simple. We all want to be better off. Delivering that over the medium-term means taking decisions this autumn that prioritise the UK’s fiscal credibility and growth.

Counter-intuitive as it may seem, raising income tax may be one of the more effective ways to get the economy to where we all want it to be.

The IoD’s full Budget submission is available here.