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Reeves eyes up 2p rise in income tax - THE TELEGRAPH
Rachel Reeves is considering a 2p rise in income tax in a move that would breach Labour’s manifesto.
The Telegraph understands that the measure is being explored by the Treasury after Sir Keir Starmer refused on Wednesday to repeat that Labour would not increase income tax, National Insurance or VAT.
Ms Reeves would become the first Chancellor to raise the basic rate of income tax since the 1970s if she made the move at next month’s Budget.
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One option being seriously considered is simultaneously cutting National Insurance by 2p and raising income tax by 2p.
The move, floated last month by the Resolution Foundation, a Left-wing think tank, would raise £6bn and hit pensioners and landlords who do not pay National Insurance.
During Prime Minister’s Questions, Sir Keir was challenged by Kemi Badenoch, the Conservative leader, on whether he stuck by his 2024 election promises.
Mrs Badenoch said: “Last year, in its manifesto, Labour promised not to increase income tax, not to increase National Insurance, and not to increase VAT. Does the Prime Minister still stand by his promises?”
Sir Keir responded: “I am glad that the Leader of the Opposition is now finally talking about the economy. I can update the House [of Commons]: retail sales are higher than expected; inflation is lower than expected; growth has been upgraded this year; and the UK stock market is at an all-time high.
“The Budget is on November 26, and we will lay out our plans then.”
In July, Sir Keir had stood by the pledges when challenged by the Tory leader at PMQs.
In briefings later on Wednesday, a Downing Street spokesman also refused to confirm that previous tax pledges still stood.
The developments were the clearest sign to date that No 10 and the Treasury are considering breaking Labour’s manifesto as they seek to fill the black hole in the public finances.
The abandonment of money-saving welfare reforms, the scaling back of the winter fuel payment cut, a downgrading in UK productivity and shifting economic forecasts all mean that Ms Reeves is having to raise tens of billions in annual revenue on Nov 26.
Estimates vary on exactly how much as the Office for Budget Responsibility, the independent economic forecaster, will update its numbers in the weeks ahead.
The Chancellor’s decision to leave herself with more fiscal headroom – money kept back to make sure her borrowing targets are hit – than the £10bn she left previously has added to the need for tax rises.
The Telegraph understands that serious consideration is being given to the Resolution Foundation’s ideas on tax.
Under its proposal, the basic income tax rate would rise from 20 to 22 per cent, the higher rate from 40 to 42 per cent and the additional rate from 45 to 47 per cent.
At the same time, the National Insurance rate would drop from 8 per cent to 6 per cent for basic rate income tax payers, and from 2 per cent to zero per cent for higher and additional rate payers.
The overall impact would be that 30 million workers who pay both taxes would pay the same amount – giving Labour a way to claim overall rates were not going up, as its manifesto pledged.
But it would amount to a tax hike on people who only pay income tax and not National Insurance, such as pensioners, landlords and the self-employed.
Overall, the move would generate £6bn. More could be saved if the National Insurance cut was less generous – an idea some former advisers to Sir Keir believe could be considered.
Downing Street and Treasury insiders have repeatedly warned against speculation, stressing that no final decisions have been made on tax changes and that many options are being explored.
Some Labour MPs are warning against breaking the manifesto, given the party recently polled at just 17 per cent amid signs of an electorate that is disillusioned with politics.
One MP told The Telegraph: “The Government should not break a clear manifesto pledge. It would just increase already high levels of public mistrust in politics.”
Mrs Badenoch will pile on more pressure over the prospect of tax rises in a speech on Thursday in which she will call for Ms Reeves to go if the manifesto pledge is broken.
The Conservative leader will say: “Nobody voted for high taxes and out-of-control spending, but that’s what they’re getting from this weak Prime Minister.
“After her Budget last year, Rachel Reeves promised she was ‘not coming back with…more taxes’. But now that looks like a lie as she is gearing up to impose more punishing tax hikes.
“The British public deserve a government with the backbone and the plan to deliver a stronger economy. If Rachel Reeves breaks her promise and puts up tax, she must get the axe.”
Meanwhile, the Confederation of British Industry found that companies expect private sector activity to fall in the next three months in a new warning sign for the economy.
Andrew Griffith, the Tory shadow business secretary, said: “This is yet more bad news for our economy, courtesy of Rachel Reeves.
“Her tax hikes have hit businesses hard, trampling any green shoots of growth underfoot and driving up inflation and unemployment in the process.”
The Treasury is widely expected to lift the two-child benefit cap in the Budget. The Resolution Foundation calls for that move in a new report on Thursday.
