Rachel Reeves billed her £38 billion in tax increases last year – the biggest tax-rising Budget since Black Wednesday – as a ‘one and done’ approach. As she prepares to deliver her second Budget in three weeks’ time, the Chancellor is set for a ‘rinse and repeat’ strategy, as she tries to wring similar sums from taxpayers. Reeves is increasingly expected to hike income tax by 2p next month. The Chancellor has informed the Office for Budget Responsibility (OBR) that a rise in personal taxation is one of the ‘major measures’ that she will announce later this month, according to the Times. The Budget watchdog will assess the impact of her plans before informing the Treasury of its assessment on Monday: the penultimate round of forecasts before 26 November.
Reeves is increasingly expected to increase hike tax by 2p next month
Reeves could change her plans, but its inclusion is a strong signal that she will break Labour’s manifesto pledge not to increase income tax rates. One way to sweeten the move would be to announce a 2p cut in national insurance at the same time: rebalancing the burden of tax away from workers. ‘It fits the spirit of her “working people” shtick’, remarks one Labour MP. The Resolution Foundation think tank – whose alumni increase populate the ranks of this government – argue that this would ‘raise £6 billion overall while protecting most workers.’
The Chancellor is determined to frame her Budget as being one in which the wealthiest pay their fair share. 'Each of us must do our bit', she told journalists on Tuesday. She is therefore reportedly considering whether to restrict any national insurance cut to earnings below £50,270, reducing the rate from eight per cent to six per cent. Earnings over £50,270 would still be subject to a 2 per cent rate to ensure that those with the 'broadest shoulders' bear the biggest burden.
The theoretical logic of a 2p rise must be weighed against the political cost. There are countless clips, tweets and statements of Reeves and her colleagues repeatedly insisting that Labour would not raise income tax, from before, during and after the election. The successful Tory effort to box Labour in on tax during May 2024 must be looked upon as the political equivalent of Pearl Harbor – a stunning assault in an inevitably doomed campaign.
It is not just the Conservatives and the press who will raise hell if she hikes tax: even her own Labour colleagues have serious private concerns. ‘How much will our word be worth in future?’ asks one. Some feel no need to confine their fears private. Lucy Powell, the newly-elected deputy leader, told the BBC yesterday that Labour should stand by its manifesto commitment not to raise income tax, national insurance or VAT. She said: ‘Trust in politics is a key part of that because if we’re to take the country with us then they’ve got to trust us and that’s really important too. We should be following through on our manifesto, of course.’
There are echoes here of protesting Tory MPs circa 2021, still citing the 2019 manifesto as a tablet of faith, even while the circumstances changed around them. As Reeves pointed out on Tuesday, the underwhelming performance of the UK economy in challenging global circumstances severely limits the choices she can make. She must either plump for dozens of small tax rises across numerous sectors – or go for the ‘big bang’ approach of a 2p rise.
Either way, political pain, anger and criticism from both in and outside the Labour party now look to be inevitable. It was John Kenneth Galbraith who said that politics was a choice between the unpalatable and the disastrous. No one knows this better than Rachel Reeves.
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