Market News

BY  Daniel Martin

Rachel Reeves is considering a stealth income tax rise in the Spring Statement next month.

The Chancellor is looking at tax increases amid tough economic news and flatlining growth, which will make it harder for her to meet her self-imposed “fiscal rules”.

One option is to extend the freeze on income taxes beyond 2028-29, which will pull in thousands of people into higher tax bands thanks to rising wages, the Financial Times reported.

Ms Reeves has repeatedly refused to deny she is considering raising taxes to help plug the fiscal black hole – despite saying last year that she would not be “coming back with more tax increases”.

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Recent poor economic data has threatened to wipe out the £9.9 billion margin of error she gave herself against her own fiscal rules in her October Budget.

Ms Reeves due to make a statement on the economy on March 26, which is officially not meant to include major tax-and-spend measures.

She is understood to want to focus on reducing public spending if she has to, but the Treasury is refusing to rule out tax rises as part of the package. One aide told the FT that Ms Reeves was taking “nothing off the table”.

‘Obvious thing to do’

Among the options being discussed is a continuation of the freeze on income tax thresholds and allowances beyond 2028. The move was considered by the Chancellor in her October Budget, but she decided against it. The income tax freeze began in April 2022, meaning that a move to continue the freeze would extend it beyond the originally planned six years.

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The Institute for Fiscal Studies (IFS) think tank says that freezing income tax thresholds from 2028-29 onwards would bring in up to £4 billion a year, if National Insurance thresholds were also frozen.

Treasury officials told the FT that the idea was “interesting” and the “obvious thing to do”.

Ahead of the Budget, the Government briefed that continuing a freeze to thresholds, which began under the Conservatives, would not breach Labour’s manifesto pledge not to raise income tax.

Paul Johnson, the head of the IFS, said that it would be “relatively politically painless”, given that Ms Reeves could announce the change now but reverse it later if the economy improves.

An announcement of the freeze could allow the Office for Budget Responsibility (OBR) to include the measure as a positive for the public finances later in the parliament, but would not require immediate legislation.

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Mr Johnson said: “I’m surprised the Chancellor didn’t extend the freeze in the Budget – it would have given them a bit more headroom against their targets.”

Politically risky

The fiscal outlook could improve between now and when the OBR produces its final report alongside the March 26 statement, meaning tax increases or harsh spending cuts prove unnecessary.

The OBR’s initial forecast last week showed Ms Reeves’ headroom was wiped out. Asked by the FT whether it could exclude Ms Reeves making tax changes in her March 26 statement, the Treasury failed to do so.

A Treasury spokesman said: “Our commitment to fiscal rules and sound public finances is non-negotiable. As the Chancellor has said, the Office for Budget Responsibility will publish their updated forecast on March 26, and she will respond to it then.”

The Treasury added it was committed to one “major” fiscal event a year, the autumn Budget.

Announcing future freezes in tax thresholds would be seen as effectively a tax rise and still be politically risky for Ms Reeves.

In November, the Chancellor told the House of Commons Treasury select committee: “We have now set the envelope for spending for this parliament. We are not going to be coming back with more tax increases or more borrowing.”