Rachel Reeves, the UK’s Chancellor, is staring down one of the toughest financial messes in recent political memory — and it’s a trap her own Labour Party helped set.
Here’s the situation. Reeves can’t slash public spending because her backbench MPs have already shown they’ll revolt, just like they did when disability benefits were on the chopping block. Borrowing more is off the table, too. With Britain’s national debt creeping up to £3 trillion, the bond markets would go into full meltdown.
She’s also sworn she won’t break her “iron-clad” fiscal rules. That leaves her with one very dangerous route to plug the staggering £50 billion budget hole: raising taxes. And not just any taxes — the kind that make voters furious and could cost her career.
Reeves has some options, but most are political landmines. Businesses are already reeling from last year’s £25 billion hike in employer National Insurance, which wiped out an estimated 276,000 jobs, with another 100,000 losses predicted by year’s end. Piling more costs on them could push shops, pubs, hotels, and restaurants over the edge, shrinking tax revenue instead of growing it, as per reports Daily Express.
The left wing of her party loves the idea of a wealth tax, claiming it could bring in £10 billion. But as Reeves knows, it’s risky. A similar move against wealthy non-doms sent some fleeing overseas, and setting up a wealth tax is so complex that she might not see any money for years.
She could reportedly squeeze more out of tobacco, alcohol, and gambling. A gambling tax bump might reportedly bring in £3 billion, but it’s barely a dent in the gap. A windfall tax on bank profits? That would reportedly alienate the City, just as Labour is trying to charm the financial sector. Cutting pension tax relief is reportedly on the table, but it’s still not enough.
That leaves the big three: income tax, National Insurance, and VAT. Each one is politically brutal. A 1% VAT increase could raise £8 billion annually, but would drive up inflation and hit the poorest hardest. Reversing the Conservatives’ pre-election NI cut from 12% to 8% could net £20 billion, but lower-income workers would shoulder more of the burden.
Which brings us to income tax, the most politically explosive option of all. Reeves is expected to extend the freeze on income tax thresholds to 2030, but that’s just a delay. To make a real dent now, she’d have to raise the rates. Economists at the National Institute of Economic and Social Research say she’d need to hike both basic and higher rates by 5% to fully close the gap. A smaller 1% or 2% rise is looking increasingly possible.
It hasn’t been done since Labour’s Dennis Healey in 1975, but as the Institute for Fiscal Studies puts it, “drastic times call for drastic action.” Reeves may be the only frontbencher fully grasping the scale of this crisis. She’s made mistakes, sure, but her party’s refusal to face economic reality has boxed her in. For now, she’s pressing on — but if she goes for income tax hikes, Britain’s taxpayers are in for a rough ride.
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