Punishing tax hikes are ‘unavoidable’ this autumn after Rachel Reeves was told she faces a black hole of up to £50billion, economists warned last night.
The Chancellor is now increasingly likely to have to break Labour’s manifesto pledge not to put up income tax, National Insurance or VAT, said experts.
It comes after the Office for Budget Responsibility, the fiscal watchdog, delivered a worse-than-expected cut to the UK’s productivity outlook ahead of next month’s Budget.
The Chancellor has already hit families and businesses with £40billion of tax increases and promised she would not come back for more.
But the latest leaked forecasts imply that the burden heaped on Britain could be even worse when she delivers her next Budget.
Rob Wood, chief UK economist at consultancy Pantheon Macroeconomics, said that meeting Budget rules to bring down borrowing and debt while also increasing the ‘headroom’ against these targets would mean ‘up to £50billion of tax rises and spending cuts’.
Even if there are some positive forecast changes ahead of the Budget that reduce this to £40billion, it would still ‘significantly raise the probability that the Chancellor resorts to a manifesto-breaking income tax hike’, Mr Wood said.
Martin Beck, chief economist at consultancy WPI Strategy, said: ‘Given the scale of the challenge, breaking the manifesto pledge not to raise the “big three” taxes may become unavoidable.
Chancellor Rachel Reeves arrives with the Minister of Finance for Qatar HE Ali bin Ahmed Al Kuwaiti on October 28, 2025
Sir Keir Starmer unveiling his party’s manifesto alongside his then shadow cabinet on December 16, 2024
‘A 2p increase in both the basic and higher rates of income tax, or reversing the 2023-24 NICs cuts, could each raise roughly £20billion – enough to fill the gap, but at significant political cost.’
Productivity growth – effectively doing more with less – is key to getting the economy motoring again, delivering the tax revenues needed for the Government to balance the books.
But it has proved consistently worse than the OBR expected.
The watchdog has been preparing to acknowledge that it has been too optimistic and experts had anticipated it would cut its forecast for productivity growth by 0.1 to 0.2 percentage points.
Its decision to do so now, in contrast to its stance during the previous Tory government, is reported to have angered No 10.
But a report in the Financial Times revealed the OBR is expected to deliver an even bigger cut of 0.3 percentage points at the Budget on November 26. The Treasury declined to comment. The Tories said the forecast was a ‘judgment on what will happen under this Labour Government’.
Shadow Chancellor Mel Stride told the Mail: ‘Labour promised growth, but if the OBR downgrades its forecasts it will be a damning verdict on Labour’s failure to deliver.
‘Rachel Reeves wants to blame everyone except herself. But these forecasts are forward-looking.Labour don’t have a plan to fix productivity and don’t have the backbone to cut spending – that is why under Labour we will always be stuck in a doom loop of more spending, increasing debt and high taxes.’
Before yesterday’s report, economists had widely expected that Ms Reeves would already be facing a black hole of £20-30 billion – thanks to rising borrowing costs and U-turns on policies such as welfare reform forced by Left-wing backbenchers.
The Chancellor (pictured with HE Ali bin Ahmed Al Kuwait) is now increasingly likely to have to break Labour’s manifesto pledge not to put up income tax, National Insurance or VAT, experts have said
the latest leaked forecasts imply that the burden heaped on Britain could be even worse when she delivers her next Budget
Speculation is already mounting that the Chancellor is actively considering an income tax rise. There are also fears that Ms Reeves could also target pensions, property and landlords to raise money.
She is also plotting to hammer homeowners with a new mansion tax, which property experts have warned is hitting the housing market.
Under the plan, revealed by The Mail on Sunday, owners of properties worth £2million and above would face a charge of 1 per cent of the amount by which the property exceeds that value – equivalent to an annual bill of £10,000 a year for a home worth £3million.
Research by the Resolution Foundation think-tank this week showed that the ‘effective tax rate’ on average earners on £33,000 a year is already at 27 per cent, the highest in 13 years.
