Rachel Reeves Plans to Raise Income Tax in Upcoming Budget

Chancellor’s Move: A Break from Labour’s Manifesto Pledge

Rachel Reeves, Chancellor of the Exchequer, has informed the Office for Budget Responsibility (OBR) that she intends to increase personal taxation as a key measure in her upcoming budget. This decision marks a significant departure from the Labour Party’s manifesto pledge, which promised not to raise income tax rates.

Implications and Timing

The move is set to be announced later this month, making Reeves the first Chancellor in 50 years to increase the basic rate of income tax. The announcement comes as the OBR has downgraded productivity forecasts, necessitating a £30 billion boost to public finances.

Strategic Tax Measures and Economic Uncertainty

Rachel Reeves is considering a 2p rise in income tax, coupled with a 2p reduction in national insurance. This plan aims to shift the burden of increased taxation away from workers towards pensioners and landlords. Economists estimate that this could generate over £6 billion annually.

Reeves has expressed a willingness to prioritize “national interest” over “political expediency,” signaling her readiness to break with party pledges if necessary. The move also includes extending the freeze on income tax thresholds until 2029-30, described as a “stealth tax” that progressively drags people into higher tax brackets.

Political and Economic Reactions

The decision has faced significant backlash from Labour’s deputy leader, Lucy Powell. Powell emphasized the importance of adhering to manifesto commitments, stating, “Trust in politics is a key part of that because if we’re to take the country with us then they’ve got to trust us.” She further added, “We should be following through on our manifesto, of course.”

Economic experts have highlighted concerns over the impact of these measures. The Bank of England’s Monetary Policy Committee (MPC) reported that consumer spending and business investment had declined due to rising fears about tax increases. This uncertainty has led businesses to postpone investments, with a significant portion expressing high levels of concern.

Future Budget Predictions and Economic Impact

The Bank of England’s forecast also warned of potential rises in unemployment and food inflation. The central bank maintained interest rates at 4%, citing the need for more evidence that inflation is under control before any reductions can be made. However, Martin Beck from WPI Strategy predicted a rate cut at the next MPC meeting on December 18th due to the expected increase in tax burdens.

With these complex economic challenges, Reeves faces significant pressure to manage public expectations while ensuring fiscal stability. The upcoming budget will likely be closely watched by both domestic and international markets as it sets the tone for the UK’s economic recovery post-pandemic.