The Chancellor is preparing voters – and Labour MPs – for a potential manifesto-breaking Budget
Millions of workers are likely to be asked to pay higher taxes in this month’s Budget after Chancellor Rachel Reeves signalled she is considering hiking the basic rate of income tax during an unusual pre-Budget speech.
The Chancellor refused to recommit to Labour’s election manifesto promises not to raise income tax, national insurance (NI) or VAT and warned voters “we will all have to contribute” to plugging the black hole in the nation’s finances.
She was speaking from Downing Street in what the Treasury called a “scene setter” speech ahead of the Budget on 26 November as she seeks to fill an estimated blackhole in the nation’s finances of £20-£30bn.
Treasury sources refused to dampen speculation that Reeves’s comments meant she was considering hiking income tax across the board, including the first rise since 1975 of the 20 per cent basic rate of income tax – paid by those earning between £12,571 and £50,270.
The Chancellor also suggested that she wanted to build in more “headroom” to her finances to make the country more resilient to shocks and changes to the markets, which would prevent her from having to return for more in the future.
Reeves wants to make finances more resilient
Economists said if Reeves is going to break the manifesto pledge, she should put 2p on income tax to raise enough cash to justify the political pain and build up enough of a war chest to avoid having to return with another raid – having already put taxes up last year.
Sources in the Treasury were also keen to stress the Chancellor’s reference to “fairness” in her comments, in a suggestion that if tax rises are broad, the richest will still be hit the hardest with levies on wealth such as a mansion tax or exit taxes, while the lower paid could get targeted help with the cost of living, for example on energy bills and with food shopping.
But in an unusual speech designed to roll the pitch for the Budget, Reeves signalled the targeted measures could be accompanied by tax rises for millions of people as she seeks to make the public finances more resilient and avoid austerity, which the Government argues damages growth.
Speaking in Downing Street, she said: “As I take my decisions on both tax and spend, I will do what is necessary to protect families from high inflation and interest rates, to protect our public services from a return to austerity and to ensure that the economy that we hand down to future generations is secure with debt under control.
“If we are to build the future of Britain together, we will all have to contribute to that effort.
“Each of us must do our bit for the security of our country and the brightness of its future.”
In a later interview with Andrew Marr on LBC, she said she would not resign if she had to break Labour’s manifesto with tax rises, which she refused to rule out four times.
“I am not going to walk away because the situation is difficult. I was appointed as Chancellor to turn our economy around, and I’m absolutely determined to finish that job.”
Her comment that “we will all have to contribute” is a marked shift from the previous Treasury message that the “broadest shoulders” should contribute most.
Labour MPs told to expect wholesale tax rises
Labour MPs who have had conversations with ministers are being told to expect wholesale tax rises rather than a hodgepodge of smaller reforms.
One MP said they thought an income tax rise was now the most likely outcome of Reeves’s deliberations.
Reeves’s omission of previous assertions that those with the “broadest shoulders” would bear the brunt of tax rises was seized on by commentators, forcing the Treasury to admit that this policy applied to previous Budget decisions.
When asked if the policy still stands, her spokesman replied: “Well, yes, because the policies of last year stand.”
Reeves said she was forced to consider manifesto-busting tax hikes because the Office for Budget Responsibility (OBR) is expected to heavily downgrade previous forecasts for productivity, hitting growth projections and reducing her room for manoeuvre by up to £20bn.
She is also trying to find billions to plug the roughly £6bn gap left by policy U-turns on welfare cuts and scrapping the winter fuel allowance, although some economists believe she could get good news due to improving wage growth and borrowing costs.
Overall, there are predictions that Reeves will need to hike taxes by around £20-£30bn.
Nevertheless, Downing Street suggested Reeves wanted to build more “headroom” against her fiscal rule to balance day-to-day spending in five years, after seeing the £9.9bn built up last year wiped out.
Sir Keir Starmer’s official spokesman said leaving a bigger buffer would help “withstand global turbulence”, giving businesses “the confidence to invest” and leaving the Government freer to spend money if necessary “without constant speculation that leaves us hostage to events and to the sentiments of the international bond markets”.
Economists suggest 2p rise
Thomas Pugh, RSM’s chief economist, said: “I think if you’re going to break the manifesto pledge, you might as well go for 2p, but I don’t think breaking it is a given.
“They will probably do everything they can not to break it and you can raise £30bn without touching income tax rates.
“A big tax-raising budget now, which lowers interest rates and gilt yields, would give them more headroom to reduce taxes in the future. Also, if the OBR significantly downgrades its productivity forecasts now, there is more chance of positive surprises in the future.”
Ruth Gregory, deputy UK chief economist at Capital Economics, said: “It’s certainly possible the Chancellor will try to get more of the pain out of the way now in the hope that she will be able to cut taxes and/or raise spending ahead of the next election, due before summer 2029.
“Indeed, there has been speculation that she could raise income tax by 2p at the same time as cutting employee NI by 2p (raising about £6bn).
“A bigger amount of headroom against her fiscal mandate and a smaller budget deficit would probably be viewed positively by the markets.”
Conservative Party leader Kemi Badenoch said Reeves had offered a “laundry list of excuses”.
Badenoch added: “She blamed everybody else for her own choices, her own decisions, her own failures.”
Labour MPs criticise Reeves
Labour MPs have criticised Reeves after she suggested she is preparing to break her manifesto pledge not to raise income tax.
The Chancellor should have been clearer with the country about her intentions in the Budget when she delivered a speech in Downing Street on Tuesday, one MP said.
Giving more clarity over tax rises would give people and businesses more time to prepare, the MP said, while another suggested Reeves could have used other measures to raise the billions needed to fill the black hole.
A senior Labour MP said: “I think she should have just said, ‘I know people are worried about how this is going to land’ and then just go big and say we’re going to break it [the manifesto] and tell them exactly what it means, without going into specific rates.
“That gives people two or three weeks to prepare for it, because the problem with employer NI was that businesses felt it wasn’t really trailed.”
The MP added that Reeves’s team “now get” the need to build in a much greater financial buffer in the Budget, having given themselves just £9.9bn last year that has been wiped out.
A Labour backbencher urged Reeves to consider hiking taxes elsewhere before turning to taxes on working people.
There have been calls for the Chancellor to increase capital gains tax or levies on property as a way to target the wealthy rather than working people.
The backbencher said: “I think there’s lots of good ways of putting up taxes without breaking manifesto commitments and you might as well do them first and get as much as you can out of that.
“I think she should look at capital gains, and normalising it with the normal rate. I quite like the idea of upping income tax but dropping NI, so it doesn’t hit working people as much.”
By Richard Vaughan and Jane Merrick
