Rachel Reeves is on course to break multiple pledges not to hammer Brits with tax rises even if she back away from an explicit increase in income tax in Wednesday’s Budget, experts have warned.
Almost exactly a year ago the Chancellor used a speech to business leader at the CBI to vow ‘no more taxes’, after milking voters and businesses to the tune of £40billion in her first fiscal plan.
That came after a Labour election manifesto that claimed the party would not increase ‘taxes on working people’, including income tax, when it came to power.
The Chancellor is said to have rowed back from plans to openly increase the tax on working people this week amid a massive backlash from inside and outside the party.
But the head of the Institute for Fiscal Studies said that continuing a years-long freeze on the rate thresholds – attacked by critics as a ‘stealth tax’, would constitute a breach of the manifesto.
Ms Reeves is widely expected to extend the freeze, potentially dragging around 1.75 million people into paying more to the Exchequer.
The IFS estimates that a two-year extension to the current freeze in the thresholds would mean 960,000 more people paying income tax and 790,000 more people dragged into the higher rate as their wages increase.
Asked by the BBC’s Westminster Hour if a freeze ‘would break the letter of the manifesto’, IFS director Helen Miller said: ‘Absolutely yes.
Almost exactly a year ago the Chancellor used a speech to business leader at the CBI to vow ‘no more taxes’, after milking voters and businesses to the tune of £40billion in her first fiscal plan.
Asked by the BBC’s Westminster Hour if a freeze ‘would break the letter of the manifesto’, IFS director Helen Miller said : ‘Absolutely yes.
‘Assuming that it’s done the same way that it’s been done so far, it will also be a freeze in National Insurance thresholds, it will therefore also be an increase in National Insurance, and if so in my mind it would also break the letter of the manifesto, which said no increase in National Insurance.
‘But yes, it might not be as salient as a rate rise, but the Chancellor would raise something in the order of £8billion to £9billion through freezing thresholds, that’s very obviously an increase in tax on people who are working’.
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The Chancellor will hike taxes on Wednesday to fill a black hole in the public finances as she faces the prospect of a downgrade in the Budget watchdog’s economic growth forecast for every year of this Parliament.
The head of the Confederation of British Industry (CBI) Rain Newton-Smith said the Government must ‘change course’ and avoid heaping more costs on firms.
At the CBI’s conference in Westminster, Ms Newton-Smith urged Ms Reeves to stand up to Labour’s backbenchers to take tough decisions on issues such as cutting welfare spending.
She said Ms Reeves had to prove she was committed to economic growth and make the hard choices to deliver it.
‘Prove it – against opposition, against short-term politics, be it on welfare, be it pension increases, show the markets you mean business,’ she said
‘Short-term politics leads to a long-term decline, and this country cannot afford another decade of stagnation.
‘That means making hard choices for growth now before they get harder, having the courage to take two tough decisions rather than 20 easier ones.
The head of the Confederation of British Industry (CBI) Rain Newton-Smith said the Government must ‘change course’ and avoid heaping more costs on firms.
‘Raising the headroom to make promises stick, it means one or two broad tax rises, rather than death by a thousands taxes.’
The scale of the task facing the Chancellor was underlined by a Sky News report that the Office for Budget Responsibility has downgraded its forecast for 2026 and every other year before the next election due in 2029.
Ms Reeves has already acknowledged publicly that growth forecasts will be hit due to the OBR’s revision of its assumptions about productivity.
The downgrade, and the subsequent reduction in tax revenues, will force Ms Reeves to hike taxes to balance the books and build a bigger buffer against future shocks than the historically-low level of headroom she has previously given herself.
At the CBI conference last year, the Chancellor sought to reassure business leaders there would be no repeat of the £40 billion tax hikes announced in her first Budget, insisting that the public finances had been put on a stable footing and services would now have to live within their means.
‘I’m really clear, I’m not coming back with more borrowing or more taxes,’ she said.
However, she and Sir Keir Starmer refused to repeat this vow within days.
