The public finances are on life support, and things have gone from bad to worse since Reeves entered No.11. Her £25billion Budget tax raid on employers backfired spectacularly, triggering job losses, stalling investment and shattering confidence.
Borrowing is now spiralling, while £110billion of annual debt interest devours a growing chunk of the Treasury’s income. Reeves has boxed herself in. She’s ruled out meaningful spending cuts and insists her fiscal rules are “non-negotiable”. With spending fixed and borrowing capped, she’s left herself with just one option – to hike taxes again.
But even that won’t be enough. Experts now reckon Reeves must raise up to £30billion, maybe even £40billion.
You don’t raise that kind of money with stealthy freezes, sin taxes or closing loopholes. The sums are too big.
The pain will be shared by everyone – not least Rachel Reeves.
Reeves and PM Sir Keir Starmer repeatedly vowed during the election campaign not to hike income tax, national insurance (NI) or VAT, claiming they wouldn’t raise taxes on “working people”. Then did it anyway.
The employer NI hike raised £25billion, and while it didn’t hit workers directly, the costs were passed on through higher prices, lower wages, more layoffs and fewer jobs.
Now independent think tank the Institute for Fiscal Studies (IFS) says Reeves has no choice. She will have to go after one of the big three: income tax, NI or VAT.
That pledge not to raise taxes on working people? It’s in tatters.
Paul Johnson, outgoing IFS director, spelled it out: “I don’t see how you (sensibly) raise, say, £30billion, without rises in NI, VAT or income tax.”
He scathingly added that Labour’s central manifesto promise “is, and always was, meaningless”. It certainly was.
Judith Freedman, tax law professor and IFS research fellow, echoed that view, urging Reeves to “do the sensible thing” and raise VAT or income tax. Labour has already broken its promises “in various ways”, she noted.
What’s one more broken promise, among so many?
Reeves is under growing pressure from Labour’s left, including deputy PM Angela Rayner, to keep hiking taxes. They don’t seem to care that higher taxes destroy growth and drive away investment, it’s pure ideology now.
Left-wing voices like the New Statesman are openly calling for Labour to raise taxes on middle earners. Its message is brutal: “Just Raise Tax.”
That train has already left the station, and Reeves is no longer the driver.
Her planned cuts have been blocked by rebellious Labour backbenchers. Starmer hasn’t backed her. Instead, he’s thrown his so-called iron chancellor overboard time and again. Now she’s rusty and sunk.
In her Budget, she’s almost certain to extend the freeze on income tax thresholds to 2030. But even that won’t be enough.
The IFS is clear. One of the big three – income tax, NI or VAT – will have to rise.
Reeves needs cold, hard cash. The only question is which of those three taxes it’s going to be, and how the Chancellor will explain herself this time. It will make painful watching all round.
