Rachel Reeves considers hiking UK’s biggest tax in huge Budget gamble – it may finish her
There’s only one thing the Chancellor can do to balance the books. Voters will hate it.
Chancellor Rachel Reeves may be about to gamble with her reputation (Image: Getty)
The autumn Budget is less than two months away and Rachel Reeves has boxed herself into a corner. Labour MPs won’t let her slash spending, bond markets won’t let her borrow more, and she won’t abandon her “iron-clad” fiscal rules. That leaves only one option, to hike our taxes again.
Worse, the Office for Budget Responsibility is expected to downgrade growth and productivity forecasts, slashing her room for manoeuvre still further. Economists warn Reeves may need to raise as much as £30billion on November 26, or even £40billion, the same as last year’s horror Budget
As with every Budget, rumours are rife. There is talk of tightening inheritance tax, reforming council tax, or introducing new property levies.
Yet these would raise just a billion or two here and there. That’s just tinkering, given the sheer scale of her black hole.
Reeves needs to go big, and she knows it. So she’s deciding whether to make a huge financial and political gamble.
During the general election, Labour promised it wouldn’t hike taxes on “working people” if it won. Reeves and PM Keir Starmer ruled out touching the “big three” personal taxes: income tax, national insurance and VAT.
Now Reeves may have to backtrack on that pledge. Even her own Budget advisory board is said to be floating the idea. Labour-backing newspapers are full of it.
For taxpayers it would be a nightmare. It would destroy what’s left of Labour’s shredded popularity. Reeves and Starmer would face charges of lying to win power. And they’d be true.
But they may do it anyway. Income tax, NI and VAT account for around two-thirds of Treasury revenues.
Without them, Reeves simply can’t raise the tens of billions she needs. Extending the current freeze on income tax and NI thresholds until 2030 will raise some money, but not nearly enough. She may have to lift the rates themselves. It would be the ultimate betrayal, but Labour may conclude there’s no alternative.
Last week, Labour’s favourite think tank, the Resolution Foundation, suggested cutting 2p off NI and adding it to income tax instead.
The logic is this: pensioners and landlords don’t pay NI but do pay income tax. That would broaden the base, but the politics would be brutal.
Labour would lose what’s left of its pensioner vote and the measure would only raise about £6billion. It wouldn’t come close to filling the gap.
That’s why attention is now turning to the big one – a direct increase in income tax rates, possibly adding a penny or two.
Hiking VAT above 20% is also under discussion, though that risks pushing inflation higher. Treasury officials are even said to examining scrapping the state pension triple lock, or shifting council tax onto a new banding system. All would be deeply unpopular.
Yet Labour reckons it might just be able to sell this to voters. Reeves could argue that higher defence spending is essential given Vladimir Putin’s growing threats.
She could say Donald Trump’s tariffs have upended the UK economy since Labour’s manifesto was written.
Whatever reasons she gives, hiking one of the big three levies means broken promises and higher bills. Voters won’t like it, but may have to swallow it anyway.
