Keir Starmer has opened the door to increasing income tax this autumn as he faces growing pressure to fill a £50bn shortfall in the public finances.
Speaking to broadcasters, the prime minister defended his record and insisted Labour had “stabilised the economy” since it came to power last year, adding that the Budget would make “sure people feel better off”.
However, asked multiple times whether he would explicitly rule out breaking the manifesto pledge of not raising VAT, income tax and corporation tax, he said: “In the autumn, we’ll get the full forecast and obviously set out our Budget.”
It comes less than a month after the prime minister vowed that Labour would not raise the three main taxes. Asked at Prime Minister’s Questions whether he could guarantee that the government would honour the pledge, he gave a simple “yes”.
Leading economists have warned Rachel Reeves that she must raise taxes or tear up her flagship borrowing rules to fill a £50bn black hole left by a combination of Labour U-turns, higher borrowing and sluggish economic growth.
Jonathan Portes, a former Treasury adviser and professor of economics and public policy at King’s College London, told The Independent that he believes wealthy pensioners should bear the brunt of any tax rises.
He said: “Obviously there is still a lot of uncertainty about how large tax rises should be. I think the basic principle has to be the tax and pension system needs to be rebalanced so that better-off older people, especially those with substantial property and pension wealth, make a much larger contribution to addressing the fiscal pressures that result from increasing spend on the NHS, social care and pensions. Also it is long past time to raise fuel duty.”
John McTernan, Tony Blair’s former political secretary, said Sir Keir and Ms Reeves would have to make “hard choices” and suggested that options include a levy on banks, wealth taxes and so-called “sin taxes”.
He said: “I think [ministers] are going to have to find some taxes … I think the tax you have to look at are, ‘let's look at people who did well in the last 14-15 years’, the banks who got a sweetheart deal from George Osborne.”
He said that some kind of tax or levy on banks was “worth looking at”. He added: “I'm not sure people would go into the streets to say ‘No, hands off my bank’.”
Mr McTernan also highlighted so-called sin taxes, such as gambling.
He told the BBC: “I'm not myself in favour of a blanket wealth tax, but you can look at taxes on wealth. Is it right that the returns on capital are taxed at a lower rate than returns on income?”
Former Tory chancellor Ken Clarke reiterated the need to reconsider the fuel duty freeze, and urged the chancellor to raise VAT.
He told BBC Radio 5Live: “I probably have looked first of all to value added tax, I used to prefer raising taxes on spending to taxes on income.
“And I would also stop this freeze on fuel tax, which for some extraordinary reason has been made over years and years.
“She[Reeves] has got to look for revenue wherever she can find it.”
After Sir Keir’s comments, Downing Street sources later insisted that Labour’s manifesto commitment not to raise VAT, income tax or national insurance, which it defines as taxes on working people. Corporation taxes were fixed for the duration of this parliament, they added.
It comes after the National Institute of Economic and Social Research (NIESR) – a leading economic think tank – said the chancellor could also look at spending cuts in the autumn Budget as a way to raise the money needed by 2029-30 to remedy a £41.2bn shortfall on her borrowing targets, set out by her self-imposed “stability rule”.
To restore an almost £10bn buffer that the government has maintained since last year’s Budget, the chancellor must therefore raise a total of £51.1bn, they warned.
The NIESR’s report said the chancellor has been left with the difficult task of trying to meet her fiscal rules while fulfilling spending commitments and upholding a manifesto pledge not to raise taxes on working people.
But after a swathe of spending cuts squeezing departmental budgets at the last spending review, tax rises are the more likely option.
The chancellor is under increasing pressure to raise income tax or consider a wealth tax.
The Niesr forecast also warned that the poorest 10 per cent of people – amounting to 2.8 million households – have seen their living standards fall 1.3 per cent under Labour, some 10 per cent lower than pre-Covid levels.
On a trip to Milton Keynes, the PM said the Budget would “build on what we’ve done” by focusing on “living standards” and “making sure that people feel better off”.
Asked whether he disagreed with the warning that tax rises would be necessary to raise revenue in the next Budget, the PM said “some of the figures that are being put out are not figures that I recognise”.
He said the chancellor’s “focus” would be living standards.
He said: “We've stabilised the economy. That means interest rates have been cut now four times. For anybody watching this on a mortgage, that makes a huge difference on a monthly basis to how much they pay.
“In the first year, we’ve raised wages as well, both in the private sector plus the minimum wage, which means people have got a bit more money coming into their pocket, and so at this stage that will be set out in the Budget, but the focus will very much be on living standards and making sure people feel better off.”
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