In its manifesto at the last election, The Labour Party promised it would not increase taxes on “working people”, specifically national insurance (NI), the basic, higher, or additional rates of income tax, or VAT.
Reeves is expected to raise taxes by around £30bn in order to meet her self-imposed fiscal rules of ensuring day-to-day expenditure is met through taxation rather than borrowing.
Measures she is thought to be looking at instead include cutting pension tax relief and hiking so-called sin taxes on the likes of gambling and tobacco.
Willem Buiter, a former chief economist at Citigroup and ex-member of the Bank of England Monetary Policy Committee (MPC) said that a 3 percentage point increase to income tax rates would raise around £20bn for Reeves.
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Read MoreStephen Millard, deputy director of the National Institute of Economic and Social Research (NIESR), said: “The Chancellor finds herself in a position where she needs to raise taxes at the next budget. But, given her commitment to not raise income tax, VAT or national insurance, she has left herself in a position where she either has to go back on this commitment or ‘tinker at the edges’.
At its first Budget last October, Rachel Reeves opted to tweak a series of small taxes – such as widening the inheritance tax base – and also increase national insurance on employers.
Currently, people in England, Wales and Northern Ireland pay 20 per cent income tax on earnings between £12,570 and £50,270. They pay 40 per cent on earnings between £50,270 and £125,000 and 45 per cent on earnings above this.
The Chancellor cannot abandon her fiscal rules without risking a loss in confidence from the bond-market, which could lead to a run on bonds of the type that brought down Liz Truss.
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But abandoning a manifesto pledge carries political risks as the Government will be attacked for doing so by the Tories and Reform and, at the next election, it will have difficulty convincing the electorate it will stick to its promises.
Sir Charles Bean, ex-deputy governor of the Bank of England: “Given they don’t seem to be able to cut spending and Reeves has committed herself to sticking to her fiscal rules, they pretty much have to resort to raising tax revenues somehow.
Julian Jessop, an independent economist, added: “If the Chancellor does have to raise ten of billions more in tax – still a big if, in my view – then some combination of increases in income tax and in VAT would be the simplest and cleanest way to do it.
“This would be almost impossible to square with the manifesto commitment. Nonetheless, Rachel Reeves could argue that this pledge has to be broken because the Office for Budget Responsibility has only now scored the full extent of the productivity slowdown left by the previous government. In other words, ‘the legacy of 14 years of Tory rule was even worse than we thought.’”
But calls for an increase to income tax have now been growing.
Edward Jones, a professor of economics at Bangor University, said: “If we strip out the politics and focus on the economics, then raising the basic rate of income tax is arguably the cleanest and least economically damaging way for Reeves to restore her fiscal headroom.
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Read MoreEarlier this week, the Resolution Foundation think-tank said Reeves should consider a cut to national insurance at the Autumn Budget and to then offset this with a rise in income tax.
If a government does not show a commitment to getting finances on a strong footing, then the cost of servicing debt – bond yields – can rise.
“The bond market would react positively if they believed that Reeves approach was achievable. I doubt they would care about the breaking of manifesto commitments. They only care that the policies can be implemented and sustained.”
The Treasury was contacted for comment.
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