Rachel Reeves is reportedly considering raising income tax in November’s Budget, in a bid to help plug the rumoured £40bn “black hole” in the nation’s finances.
Yet, given the Labour Party pledged not to raise the rate of income tax in its election manifesto last year, such a decision could be politically damaging. So, should Rachel Reeves raise income tax? The i Paper’s experts give their verdict.
Hugo Gye: Bite the bullet now
Raising income tax would not be easy for Rachel Reeves. But it is her least bad option.
The Chancellor, like her Conservative predecessor Jeremy Hunt, has been sailing close to the wind on the public finances, maxing out the borrowing she is allowed under her self-imposed fiscal rules.
The bond markets have punished her with higher borrowing costs, which further unbalances the books and forces Reeves into a doom loop of tax hikes every time the Office for Budget Responsibility does its twice-yearly stocktake.
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The Labour Government clearly believes, not unreasonably, that public services need more cash and radical cuts to benefits or pensions are not possible. That means higher taxes.
It would be far better to bite the bullet now, by breaking the manifesto promise and increasing income tax by say 2p, than to keep trying to meet the fiscal rules by a tiny margin through dozens of incremental tax tweaks that anger voters without bringing in enough to ensure stability.
Raising income tax would also remind the public that more spending on services comes with a cost, and that hoping someone richer will pay that bill is, in the long run, unrealistic.
Hugo Gye is The i Paper’s political editor
Emily Braeger: The optics are brutal
Breaking a manifesto pledge isn’t just a political misstep – it’s a breach of trust. And right now, trust is in painfully short supply. Labour promised not to raise income tax, national insurance, or VAT on working people, yet the pressure to close the fiscal gap is real.
In an ideal world, I would be firmly against any backtracking, as history shows how quickly credibility erodes when promises are broken. The winter fuel payments U-turn still stings, a reminder that policy reversals hit harder than any line in the budget.
Every abandoned promise chips away at public faith in government, and when confidence is already fragile, another U-turn could be deeply damaging. Yes, some argue that this approach is the lesser evil compared to alternatives like a wealth tax, which has failed spectacularly elsewhere.
But even if it makes sense economically, the optics are brutal. Opponents will cry hypocrisy, and voters will feel betrayed. Reeves face the stark choice of addressing the fiscal gap and risking her party’s credibility, or pursuing alternatives that don’t break her party’s promises.
Sadly, we don’t live in an ideal world. I may wish Rachel Reeves could stand firm, but reality demands hard choices, and sometimes, doing the sensible thing still hurts.
Emily Braeger is a money reporter at The i Paper
Frances Coppola: If we want good public services, taxes need to go up
In the run-up to the last election, Labour promised not to raise three headline taxes: VAT, national insurance, and income tax. Now, reports say Rachel Reeves is considering raising income tax by 1p to help close the black hole in the public finances.
There’s no doubt Reeves needs to find more money. If she doesn’t, she will have to cut public services and welfare – and after 15 years of cutbacks, there’s not much low-hanging fruit left. The Labour Government has already had to water down cuts to disability benefits and the winter fuel payments to pensioners, and is politically unable to tackle expensive commitments such as the triple lock on pensions. Slashing sickness benefits and clamping down on Motability would not raise anything like enough money. And nor would further harshness to asylum seekers.
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Reeves doesn’t have many options left. She has already raised employers’ national insurance, to the detriment of many businesses. A wealth tax is unlikely to raise much money, since the very rich always find ways of avoiding tax. Raising VAT would dampen economic activity and add to inflation.
Tinkering with the Bank of England’s independence would risk another Liz Truss-style market panic. And passively raising income tax by freezing thresholds disproportionately hurts people on low incomes, potentially including state pensioners. It would be fairer to raise the rate.
It’s time to level with the British people. If we are to have good public services, an NHS fit for purpose, and sustainable public finances, Reeves must raise income tax.
Frances Coppola is an economist and author
Kwasi Kwarteng: It would destroy the Government’s credibility
Confidence in politics across the world is at an all-time low. The causes of this general disillusionment are varied and contentious. But one of the more salient causes is the fact that politicians are accused of being insincere.
The public believes that politicians say one thing and do another. The accusation simply is that politicians always break promises. You just can’t trust what they say.
For Rachel Reeves to increase income tax would be a cynical betrayal of what Labour pledged to do ahead of the election.
The Labour manifesto could not have been clearer. The party pledged it would “not increase taxes on working people, which is why we will not increase national insurance, the basic, higher or additional rates of income tax, or VAT”.
However you define “working people”, the taxes which were not going to be raised are very explicit.
Raising income tax less than 18 months after the general election would destroy the Government’s credibility. Why should anybody trust what they said on anything else, if such a clear promise is broken, so early in the parliamentary term?
Kwasi Kwarteng is a former Conservative MP. He served as chancellor between September and October 2022 under Liz Truss
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