Rachel Reeves is considering raising income tax at next month’s budget to help reduce a multibillion pound shortfall, sources have told the Guardian. The chancellor is in active discussions over breaking one of her party’s main manifesto pledges as she looks for ways to clear an estimated shortfall of more than £30bn.
Some advisers in the Treasury and No 10 believe that raising income tax may be the only way to ensure she raises enough money to avoid further tax rises in this parliament. However, Reeves is understood to be nervous about the political consequences of such a major abandonment of the party’s previous pledges, especially given she broke them to raise national insurance last year.
The Treasury is also torn over which rates to raise. One source said Reeves is considering adding 1p to the basic rate, which would raise more than £8bn, but could add to cost-of-living concerns. Others believe she is more likely to raise the higher or additional rates, which kick in at roughly £50,000 and £125,000 a year, bringing in about £2bn and £230m respectively.
One senior official said current discussions centre on how much room Reeves wants to give herself against her fiscal rules. The chancellor has said she wants to have more than the £10bn accounted for at the spring statement, which has since been eroded by changing economic forecasts. “There is a very live debate going on right now among those planning the budget about how bold we want to be on the headroom,” the person said.
Reeves is facing one of the most difficult budgets any chancellor has contemplated in recent years, mainly due to a decision by the Office for Budget Responsibility to downgrade its estimates for Britain’s economic productivity, costing an estimated £20bn a year. The pressure has eased slightly due to falling interest rates on government debt, offering potential savings of between £2bn and £3bn.
