“Labour promised not to increase income tax, not to increase National Insurance and not to increase VAT. Does the prime minister still stand by his promises?” That was Conservative leader Kemi Badenoch’s opening salvo at Prime Minister’s Questions this week.
The answer from Keir Starmer was eyebrow-raisingly non-committal, stating only that the government would “lay out” in the Budget its plans to “build a stronger economy” and “deliver a better future for our country”.
That Budget is still a month away but there are widespread reports that Rachel Reeves is considering a manifesto-busting move to increase the top 45p rate of income tax rate or to lower the threshold at which people have to start paying it.
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Come the Budget, the Chancellor faces “a terrible choice”, said Martin Wolf in the Financial Times. Either she must “cut spending that people want and raise taxes that people feel they cannot afford” or she has to “allow explosive rises in public debt”. That, in short, is “the plight of Rachel Reeves”.
With the Office for Budget Responsibility expected to deliver a further £20 billion-plus blow to public finances by downgrading its productivity forecast, the chancellor has limited options. She is under pressure from many within her party to increase spending, rather than cut it, and has already confirmed she will not borrow more to balance the books.
To avoid breaking Labour’s manifesto pledge, Reeves could impose some wholly new taxes. She has been “holding discussions over a raft of” possibilities, said David Maddox and Caitlin Doherty in The Independent. These are said to include a 1% mansion levy on properties worth over £2m, a gambling tax and a bank profits levy. There is also talk of further capital gains reforms, and “ending tax relief on pensions”.
But raising money in this way risks causing “unnecessary amounts of economic damage” and adding “needless complexity to the system”, Isaac Delestre of the Institute for Fiscal Studies think tank, told the paper.
There is a “persuasive case for ignoring the Labour manifesto”, said Adam Smith in The Telegraph. Raising income tax will “demonstrate that the government is serious about getting a grip on public finances” and it will be rewarded by the bond markets with a “multibillion-pound fall in government borrowing costs”. It will “be less damaging to GDP than any further raids on business taxes” and the increased revenues will “help the Bank of England tackle inflation”.
What next?
Economists and Treasury mandarins may be lining up to agree that there’s a “powerful case” for a small income tax rise, said Smith in The Telegraph, but it would be “a misjudgement so grave, it would destroy Reeves’ career and this government”.
“Promises made” must be “promises kept”, said The Guardian’s editorial board. If not, “it will be terrible for politics”, said Lewis Goodall on his Substack. “Backtracking on one of the only promises about which voters might be aware” would mean it’s “game over for the party”.
Breaking the income tax manifesto promise would “come with a colossal political hit”, said the BBC’s political editor Chris Mason. But such is the state of the economy, “some within the party” are telling Reeves “to go for it” anyway.
