Reeves must raise income tax – then focus on helping workers ...Middle East

Today, Rachel Reeves gave a clear indication that income tax will rise. It’s a defensible move on economic terms, if done right, but there may be a heavy political price to pay. 

Labour’s 2024 manifesto was a work of fiction, but it clearly pledged no rises in income tax: “Labour will not increase taxes on working people, which is why we will not increase … the basic, higher, or additional rates of income tax.”

Labour stated there would be no need to raise taxes more widely, either. Instead of the magic money tree, Reeves and Starmer presented themselves as the magic management team – competent managers of the Government who would increase confidence and growth. They should have realised that economies don’t run on “vibes”, but fundamentals.

It feels like nothing is working. The housing crisis has got worse and the cost of living has been intensified by rising rents, rising mortgage costs and soaring energy and water bills. NHS waiting lists are down – but only marginally – and in many parts of the country it’s still hard to get a GP or a dentist. Social care remains woefully underfunded.

So, Reeves’s belated engagement with reality – that the UK cannot be a low-tax country with world-class or even just “decent” public services – is welcome. Her statement that she will “protect our public services from a return to austerity” is right.

Reeves only hinted at income tax rises, saying “each of us must do our bit” and “we will all have to contribute to that effort”. But the Labour-aligned Resolution Foundation has been more explicit, recently publishing a report advocating “to raise income tax by a 2p rise across all three rates, offset by a 2p cut in employee national insurance (NI). This would raise £6bn while protecting most workers”.

This would mean £6bn raised mostly from higher earners – and therefore protecting workers on low and average incomes. But the NI offset would not benefit pensioners, meaning even those on relatively modest pensions would be paying more tax.

There are plenty of other options for the Chancellor. Not all of the offset has to come via the tax system and deplete revenues for public services. Reeves could load the burden on those corporations that have been profiteering due the cost of living crisis – by forcing down energy and water bills, supermarket prices or by capping (or even freezing) rent increases.

New research from the Unite union, which represents workers in the energy sector, found that energy companies made £30bn in profit from the UK energy system in 2024 – which equates to around £500 per household and a quarter of business bills. People expect a Labour Government to tackle obscene profiteering like this.

Despite the taxes being at historically high levels overall for the UK, we still have a lower tax burden than most other comparable countries – and workers on an average income in the UK pay a lower rate of tax than those in France, Germany – and even the US. We are not a “high-tax country” – quite the opposite.

The problem is the cost of living – our energy, transport and housing is expensive by international standards – and that’s why Reeves bearing down on energy companies and landlords would be popular and radical. Doing so would also help the beleaguered Chancellor deflect the post-Budget narrative that she has broken her manifesto pledge on income tax (assuming she does).

As things stand, Reeves faces a dilemma. It will become increasingly clear that Labour was elected on a fundamentally dishonest manifesto that was not straight about the dire state of the economy and what would be needed to put it right. Reeves would now be compounding that dishonesty by hiking income tax in breach of that manifesto commitment.

That case is unarguable. But by offsetting the impact on most workers by capping bills or rents, Reeves would at least create a new narrative that she is taking on the root causes of the cost-of-living crisis (the number one issue for voters).

Fundamentally raising taxes is not an end in itself. People have to see real improvements in the availability and quality of public services and their living standards improving. If Reeves can deliver that, then breaching a manifesto commitment will be irrelevant at the next general election.

But a deeply unpopular Government that has already alienated much of its core support and is seemingly about to breach a key manifesto pledge is in perilous territory. It’s a gamble – but at this stage, not taking the risk is tantamount to terminal decline.

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