Rachel Reeves is facing pressure from Labour colleagues to abandon manifesto commitments rather than resort to a 'pasty tax' budget reliant on numerous small revenue-raising measures. The Office for Budget Responsibility (OBR) presented its first fiscal forecast to the Treasury on Friday, amid internal government tension over the pledges.
Labour's manifesto ruled out increases to national insurance, VAT, or income tax—which together account for about 75% of tax revenue. One source familiar with pre-budget discussions said: 'There’s a political risk that No 10 are increasingly worried about, that we’re dying a slow death by the manifesto pledges, and the budget will look like a hodgepodge.'
Reeves remains committed to the manifesto promises and is not seeking costings for measures that would breach them. The OBR's preliminary growth forecast is significantly more pessimistic than earlier projections, leaving Reeves potentially £20bn to £40bn short of the £10bn headroom she had in spring, after accounting for higher borrowing costs and U-turns on winter fuel and welfare cuts.
The Treasury hopes to soften the blow by persuading the OBR to factor in pro-growth impacts of government policies. Meanwhile, Keir Starmer's chief secretary, Darren Jones, weakened the government's line on tax pledges at Labour's conference, stating the manifesto 'stands today because decisions haven’t been taken yet.'
Options under consideration include levying national insurance on landlords' rental income, charging capital gains tax on wealthy emigrants, and limiting pension tax relief. A cabinet minister noted large firms prefer a manifesto-breaking increase in personal taxes over a series of smaller measures, citing the 'pasty tax' risk reminiscent of George Osborne's 2012 budget backlash.
A senior Labour strategist argued that 'broad-based tax rises' like income tax or national insurance increases would be easier to explain to voters than a portfolio of smaller tweaks. With Reeves expected to need up to £40bn, tax reform campaigners had hoped for action on long-criticised aspects like equalising capital gains and income tax rates.
