At a glance
• Chancellor Rachel Reeves is under pressure to fill a £50bn hole in the public finacnces, with a 2p increase in the basic income tax rate likely despite Labour’s manifesto pledge not to raise levies on “working people”
• Leading think tank NIESR warns Reeves is on track to miss fiscal targets by £38bn, saying income tax rises are the least damaging option compared to VAT or corporation tax hikes
• A 2p income tax increase could raise £20bn but slightly slow economic growth, as Reeves faces mounting political backlash ahead of the November 26 Budget
The Chancellor is under increasing pressure to plug a £50billion black hole in the UK’s finances with at least a 2p hike to the basic rate of income tax.
Rachel Reeves yesterday gave her strongest indication yet that she will break Labour’s manifesto promise not to raise taxes on “working people” at her Budget on November 26.
Ministers are facing questions about which taxes could rise in a matter of weeks after the Chancellor took the unusual step of making a pre-Budget speech in Downing Street where she warned everyone will "have to contribute" to secure the country's economic future.
She was told by the Tories to resign if she goes ahead with raising levies on workers.
If she does rip up the manifesto and increases the basic rate of income tax, she would be the first Chancellor in 50 years to do so.
Leading think tank the National Institute of Economic and Social Research (Niesr) on Wednesday said it believes the Chancellor is on track to miss one of her fiscal rules by £38.2 billion in 2029-30.
This is before the near £10 billion required to rebuild the fiscal buffer that has been wiped out.
The group said Ms Reeves will likely need to break her manifesto pledge and increase income tax, rather than "messing around" with changes to marginal taxes, which it argues would be more damaging to the economy in the long run.
It suggested a 2p rise on the 20% basic rate of income tax was likely to be the minimum needed to repair Britain's battered public finances, echoing a similar suggestion by the Resolution Foundation, another think tank which has been influential upon the Government's thinking.
The rise would raise around an estimated extra £20billion for the Treasury.
A 5p rise on the 40% higher rate would add a further £10 billion, with around £500 million from a similar hike to the upper band, it added.
This would impact economic growth - knocking off around one percentage point on forecasts for next year to 1.1% in 2026, rising to a 0.3 percentage point hit in the third year.
But the think tank cautioned the alternatives were far worse, with a rise in VAT pushing up inflation as costs are passed on to consumers, while corporation tax hikes "discourages investment leading to permanently lower GDP".
If credibility in the public finances is not restored, borrowing costs are set to remain high while debt will reach "unsustainable" levels, Niesr said.
In an unusual speech just three weeks out from the major fiscal statement, the Chancellor on Tuesday would not commit to Labour's manifesto promises not to raise income tax, national insurance or VAT, fuelling speculation.
David Aikman, a Niesr director, said: "The economics are clear; what is required now is political will - the readiness to take difficult decisions on tax and spending in this Budget in the long-term interests of the UK economy."
In its forecast, Niesr upgraded its growth outlook for 2025 to 1.5% from 1.3% in August, but kept its prediction for next year at 1.2%.
It believes the Bank will hold interest rates at 4% this week, but will cut again in February as inflation is set to fall from 3.8% currently to 2.7% in the second quarter of next year.
