Chancellor Rachel Reeves is understood to be worried about the political fallout from reneging on previous Labor promises.Photo: Wiktor Szymanowicz/Future Publishing/Getty Images
Rachel Reeves is considering raising income tax in next month’s Budget to help reduce a multi-billion pound deficit, sources have told the Guardian.
The chancellor is hotly debated about breaking one of her party’s key manifesto promises as she looks for ways to scrap more than £30bn of tax cuts.
Some advisers to the Treasury and the 10th believe that raising income tax may be the only way to ensure it raises enough money to never have to return to this parliament for a tax hike again.
But Reeves is understandably worried about the political fallout from such a big renege on the party’s previous commitments, especially given that it broke them to increase the national ban last year.
The Treasury also has no idea what interest rates it could raise. One source said Reeves was considering adding 1p to the base rate, which would raise more than £8bn. However, it is likely to raise concerns about the cost of living.
And with the chancellor promising that the biggest burden would fall on those with the “broadest” shoulders, others believe she is likely to impose higher or additional rates. These rates, which start at around £50,000 and £125,000 a year, bring in much smaller amounts of around £2bn respectively. and 230 million
Related: How could Rachel Reeves fit lawyers, accountants and doctors into her budget?
One senior official said the current debate revolved around how much leeway Reeves wanted to give himself over his fiscal rules.
The chancellor stated that she wants to have more than 10 billion. pounds sterling it estimated in a spring report that has since been downplayed by a changing economic forecast, but it has not yet decided how much.
“There’s a very lively debate among budget planners right now about how bold we want to be,” the person said.
“Nobody wants it to be £10 billion again, but there is an argument that we are going much further, which will mean we don’t have to go back and do it again and maybe have room for tax cuts ahead of the budget.”
“But if we go down this path, it’s more likely that we’ll have to raise income tax – that’s the debate we’re having right now.”
Another said: “Rachel is understandably worried, but the extra space is very welcome. But we need a stronger case for our purpose if we’re going to do this.”
A third source said: “Politics is bad either way. I think it’s important to do the right thing.”
The Treasury declined to comment. While Reeves and Keir Starmer insist their manifesto commitments “stand”, they have not reached a guarantee that they will not be breached in the budget.
Reeves faces one of the toughest budgets any chancellor has considered in recent years, largely because of the Office for Budget Responsibility’s (OBR) decision to cut its forecasts for Britain’s economic productivity.
The decision alone is expected to cost the chancellor around £20 billion a year, and she will also have to deal with the scrapping of the winter fuel cut, cuts to social benefits and an expected move to remove the two-child benefit cap.
The pressure has eased somewhat in recent days thanks to falling interest rates on government debt, which have fallen to the lowest in more than a year, allowing it to save between $2 billion and $3 billion.
The chancellor also plans to raise an extra £2 billion by increasing national insurance for doctors, lawyers and accountants who work through the partnership. And it hopes to pass government planning legislation in time to make the OBR accountable.
None of these relatively minor tax and accounting changes is likely to give her enough money to ensure that her savings are not eroded by future economic fluctuations.
As a result, some allies are calling for her to take a one-off decision and break one of the party’s key manifesto promises by raising income tax.
The plans are now being considered by the Budget Board, a group of advisers from Downing Street and the Treasury who meet regularly to discuss the chancellor’s options. The board is co-chaired by Treasury Minister Torsten Bell and Chief Economic Adviser to the Prime Minister Minouche Shafik.
Advisors say there are many options on the table.
The basic principle, they say, is to ensure that those who can pay more tax should do so first. But raising the surtax rate, which applies only to top earners, would raise only $230 million for every penny raised.
A 1p rise in the higher income tax rate to 41p would raise £2.1bn a year. pounds sterling, but it would apply to anyone earning more than £50,271.
One source said the chancellor was considering raising the basic rate of income tax by 1p, which would bring in a much higher £8.2bn. pounds a year, but can be seen as politically toxic.
One of the solutions promoted by the Resolution Foundation think tank, formerly chaired by Bell, is to increase the basic rate of income tax by 2p but cut national insurance for workers by 2p. The move would raise £6bn and shift more of the burden to pensioners and home owners who do not pay National Insurance.
Ruth Curtice, director of the Resolution Foundation, said: “Of all the major taxes, income tax is the most relevant to the UK’s current economic woes of slow growth and persistent inflation.
“Regardless of whether income tax rates are changed or not, tax reform should be implemented to reduce employment tax rates that are higher than other forms of income.
