Chancellor Rachel Reeves is eyeing up a simultaneous 2p hike to income tax and 2p cut to national insurance, it has been reported, in an effort to raise some £6bn.
Reeves is considering the controversial tax hike, according to The Telegraph, which would breach the Labour Party manifesto and risk infuriating voters.
It would also only affect pensioners and landlords who do not pay national insurance. Rachel Reeves would also be the first Chancellor to raise the basic rate of income tax in 50 years.
The idea was floated by researchers at the left-leaning Resolution Foundation, where Treasury ministers Torsten Bell and Dan Tomlinson used to work.
Income tax hike
Leading economists have called for Reeves to raise income taxes to generate more revenue without “tinkering” with smaller taxes, thereby making HMRC systems more complex.
The Institute for Fiscal Studies (IFS) said in a report that not raising income tax, national insurance, or VAT would have “particularly damaging effects” on the UK economy, given the Chancellor faces having to fill an estimated £30bn shortfall in public finances.
Business groups, including the Institute of Directors, other think tanks and top City analysts, have also agreed that raising income tax would have the least damaging implications for growth.
The Resolution Foundation economist Emily Fry and the IFS’ David Sturrock was also added to an advisory board of economists earlier this week in further signs that Westminster think tanks have had an influence on policymaking ahead of the Budget.
Keir Starmer refused to rule out whether Reeves would break the Labour Party manifesto at this year’s Budget.
Oil and gas tax cut considered
It has also been reported that the Treasury could consider an early scrapping of the windfall tax on the North Sea in order to boost investment in oil and gas extraction.
The Financial Times has reported that the energy profits levy could end in March 2029 rather than in 2030, reversing a decision she made at last year’s Budget.
Industry chiefs have suggested replacing the windfall tax, which means the effective tax rate for energy companies is 78 per cent, with a new scheme that could drive investment in the North Sea and help boost the UK economy.
Keir Starmer has said that oil and gas would be part of the “mix” for UK energy bills and he wished to “double down” on the sector.
Rachel Reeves under pressure
The Tories are formally calling for Reeves to be sacked as Chancellor if she raises taxes after saying last year she was “not coming back with more borrowing or taxes”.
Shadow Chancellor Mel Stride has also suggested that the Treasury is conducting expectation management and “whipping us into a fury” in order to make people “feel better” about tax hikes and manifesto breaches.
Other taxes reportedly under consideration are exit taxes and a new mansion tax.
Reeves could also move ahead with making the stamp duty a staggered payment under growth-focused plans being discussed in the Treasury.
Economists have widely criticised her decision to leave herself with a small £9.9bn headroom at the Spring Statement.
Higher borrowing costs, productivity forecast downgrades and costs from U-turns on welfare savings since March have left her with a larger fiscal hole.
The Chancellor has indicated she wants to build a bigger fiscal buffer at this year’s Budget to better “absorb shocks”, suggesting that bigger tax hikes are set to come.