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, according to three sources close to the budget process.
Some advisers in the Treasury and No 10 believe that raising income tax may be the only way to ensure she raises enough money never to have to come back for tax rises again in this parliament. But 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 it could raise. One source said Reeves is considering adding 1p to the basic rate, which would garner more than £8bn. However, doing so is likely to add to concerns about the cost of living. With the chancellor having promised to make sure those with the “broadest shoulders” face the highest burden, others believe she is more likely to raise the higher or additional rates. Those rates, which kick in at roughly £50,000 and £125,000 a year, bring in much smaller sums of about £2bn and £230m, respectively.
One senior official said current discussions centred on how much room Reeves wanted to give herself against her fiscal rules. The chancellor has said she wants to have more than the £10bn she accounted for at the spring statement, which has since been eroded by changing economic forecasts, but she has not yet decided how much. “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. “No one wants it to be £10bn again but there is an argument we go much higher, which will mean we don’t have to come back and do this again and might have space to cut taxes before the budget. If we go down that route however, it makes it more likely that we have to raise income tax – that is the discussion that is going on at the moment.”
Another source said: “Rachel is understandably nervous but there is a big desire for additional headroom. But we need a stronger argument about our purpose if we are going to make the case.” A third source added: “The politics is bad either way. What matters, I think, is doing the right thing.” The Treasury declined to comment. While Reeves and Keir Starmer both insist their manifesto commitments “stand”, they have not gone as far as guaranteeing not to break them in the budget.
Reeves is facing one of the most difficult budgets any chancellor has contemplated in recent years, thanks mainly to a decision by the Office for Budget Responsibility (OBR) to downgrade its estimates for Britain’s economic productivity. That decision alone is expected to cost the chancellor an estimated £20bn a year, while she also has to account for reversing the winter fuel cut, abandoning cuts to welfare payments and an expected move to end the two-child benefit cap. The pressure has eased slightly in recent days thanks to falling interest rates on government debt, which have fallen to their lowest rates in more than a year, giving her potential savings of between £2bn and £3bn.
