Senior Labour figures are pressing Rachel Reeves to break with the party’s manifesto commitment not to raise income tax.
Increasing income tax would be a more effective way to fix the public finances rather than tinkering with a range of smaller measures, some MPs believe.
In November’s Budget, the Chancellor is expected to have to raise tens of billions in fresh taxes because of poorer economic forecasts and U-turns on policies such as welfare reform and cutting winter fuel payments.
Latest estimates suggest she will be £22bn short of meeting her fiscal rules of paying for day-to-day expenditure through taxation rather than borrowing.
However, Reeves is hemmed in on what taxes she can increase because of the commitment Labour made in its general election manifesto not to raise taxes on “working people”.
The manifesto defined the commitment as not increasing “National Insurance, the basic, higher, or additional rates of income tax, or VAT”.
On Wednesday, the Prime Minister’s spokesman ruled out raising income tax, telling journalists: “The manifesto commitment stands.”
‘One big painful move’
But some Labour MPs think that putting up the rate of income tax would be a better way of plugging the hole in the national finances and would cause less damage to the economy in the long term than other measures under consideration, such as freezing income tax thresholds beyond 2028 – a move which is now widely expected in Westminster and the City.
A minister who supports hiking income tax told The i Paper that freezing thresholds instead would be “weak”.
A Labour MP told The i Paper the Government needed to build “much larger” fiscal headroom “to navigate the rest of the Parliament and tee up clear dividing lines by 2029”.
“The key question is how to do it,” they said. “Do you nibble at a range of smaller tax measures that together close the fiscal hole and build a buffer, but risk undermining the growth agenda and upsetting a patchwork of specific constituencies? Or do you go for one big, painful move that affects everyone and breaches a manifesto commitment?
“Neither are great choices.”
They added: “I doubt [the Treasury] will want to breach the manifesto unless they have an absolutely cast-iron guarantee from No 10 that they’ll get full political cover. But that does mean some gentle pitch-rolling probably needs to start now if it’s even on the table.”
A senior Labour source meanwhile told the Financial Times that putting up income tax would be “like taking a single punch to the face rather than a thousand cuts over a long period”.
Economists also back raising income tax, arguing that the current tax system is over complicated and small measures will make it even more so.
Rise would ‘help boost growth’
In September Stephen Millard, deputy director of the National Institute of Economic and Social Research (NIESR), told The i Paper: “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’.
“We think that now is not the time to do the latter. Rather the Chancellor should look to raise income tax – which has the least negative effect on growth of the three big taxes – to put the public finances back on to a firm footing and then lay out a tax reform agenda, which could help boost UK growth in the future.”
Separately, The Times reported that Reeves is looking at launching a £2bn tax raid on solicitors, accountants and other professionals by imposing a new charge on those who use limited liability partnerships.
Currently, LLPs are not subject to employer’s national insurance contributions, which Reeves is reported to consider unfair.
Carve out for GPs over LLP tax
If the Treasury does press forward with the plan, it is speculated that GPs could be given a carve out.
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The i Paper understands that the Treasury has not yet held discussions with the Department for Health and Social Care about the matter, with senior figures in the department only learning about the idea when it was reported in the press.
On Wednesday, Reeves received some rare good news after inflation for September came in at 3.8 per cent.
The lower than expected figure will save Reeves hundreds of millions because the September figure is used to uprate benefits in April.
It also raises the prospect of quicker than expected interest rate cuts, with economists at Bloomberg saying that a fall in the UK’s government’s borrowing costs could give Reeves billions more to play with in the Budget.
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