Rachel Reeves needs to row back on her manifesto pledge not to raise income tax, national insurance or VAT, a leading think tank has said, as the chancellor seeks to fill a £30bn black hole at the Budget.
The chancellor should “reject the path of least resistance” and consider rowing back on her “rash” commitment not to raise the three main taxes at the Budget, the Institute for Government (IfG) said, arguing Labour’s “unrealistic” approach to tax has left Ms Reeves reaching for “piecemeal changes”.
It comes amid a growing expectation that the Treasury will have to increase taxes by as much as £30bn in the upcoming Budget, as a result of sluggish productivity, government U-turns and higher than expected interest payments.
It is understood that Treasury officials currently believe the Office for Budget Responsibility will lower its forecasts for productivity growth, which would mean an extra £20bn worth of tax rises would be required.
Another £5bn would be needed to pay for the government’s decision to row back on welfare reforms earlier this year, while a further £5bn is thought to be needed to pay for higher than expected interest payments.
The black hole is likely to make it difficult for the department to commit to ending the controversial two-child benefit cap, despite growing pressure on the government to do so.
Ms Reeves is facing increasing pressure to rescue the UK’s troubled finances in the Budget, but the government has repeatedly said it will not increase the rates of VAT, income tax or national insurance at the Budget in November.
The IfG report calls on Ms Reeves to undertake serious tax reform, instead of reaching for an “eclectic grab bag of tax raisers”, which could further complicate the system.
IfG deputy economist Tom Pope said: “This autumn, the chancellor finds herself in a difficult position.
“With tax rises all but inevitable, she should reject the path of least resistance, often taken by her predecessors, of raising taxes in an inconsistent way based on what seems easiest.
“Instead, now is the time to commit to tax reform and lay out an agenda on tax that fits with her broader growth objectives.”
The IfG report, ‘2025 budget and beyond: How Rachel Reeves can approach tax reform to help drive growth’, also warns that the introduction of a wealth tax would be difficult.
It comes after the Resolution Foundation think tank proposed a 2p cut in national insurance, matched by a 2p rise in income tax, to raise £6bn, create a “level playing field” and protect workers’ pay.
The think tank says the changes would help tackle “unfairness” in the tax system, as income tax is paid by more people, including pensioners and landlords.
Meanwhile, the Organisation of Economic Co-operation and Development (OECD) warned that higher tax and spending cuts are set to drag on UK growth next year, adding to a hit from US president Donald Trump’s tariff hikes and one of the highest inflation rates among the G7 economies.
The OECD said Britain’s “tighter fiscal stance”, meaning higher taxes and reduced government spending, is expected to weigh on the economy, with growth set to ease sharply from 1.4 per cent this year to 1 per cent in 2026.
Economists from the influential organisation also predicted that UK inflation will surge, with Britain experiencing the highest level among the G7 group of advanced economies this year.
It comes just days after experts warned tax rises were “inevitable” in the wake of new figures which showed government borrowing had soared, the latest in a long list of blows for the chancellor.
Amid rising expectations that major tax hikes are on the way, Treasury chief secretary James Murray on Monday refused to rule out increases, telling ITV he would not “write a Budget here”, pointing to the 26 November event instead.
But the housing minister Matthew Pennycook insisted Labour will stick to its manifesto pledge not to increase income tax.
“We’re going to honour our commitments not to increase the rates of income tax, national insurance or VAT on the pay packets of working people”, he told Times Radio.
“The principles that will underpin this Budget are that we’re going to build an economy that works for all working people, we’re going to stick to those non-negotiable fiscal rules that have provided us the foundation for economic stability”.
A Treasury spokesperson said:“We are protecting payslips for working people by keeping our promise to not raise the basic, higher, or additional rates of income tax, employee national insurance or VAT. That’s the Plan for Change – protecting people’s incomes and putting money into people’s pockets.
“The chancellor makes tax policy decisions at fiscal events. We do not comment on speculation around future changes to tax policy.”
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