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UK Chancellor hints at tax increases in pre-Budget address
Chancellor Rachel Reeves warned of "necessary choices" in the forthcoming Budget, strongly implying tax rises despite Labour's election pledge not to increase income tax, VAT, or National Insurance. Speaking from Downing Street on Tuesday, Reeves framed the move as a response to escalating global economic challenges, including inflation, high interest rates, and geopolitical instability.
Breaking manifesto pledges?
Pressed by journalists on whether the government would break its election commitment, Reeves avoided a direct answer, stating she was "setting the context for the Budget." Her remarks effectively removed lingering doubts about potential tax hikes, though she declined to specify which levies might rise. Instead, she emphasized the need for "growth with fairness," targeting reductions in NHS waiting lists, national debt, and cost-of-living pressures.
"We will all have to contribute to that effort," Reeves said, framing the measures as essential for national security and future prosperity. She cited poor productivity-blaming Conservative policies like Brexit, austerity, and reduced infrastructure spending-as well as global inflation and uncertainty from US tariffs under Donald Trump as key drivers behind the fiscal squeeze.
Political and economic reactions
Conservative leader Kemi Badenoch dismissed Reeves' speech as "one long waffle bomb," arguing it left business leaders "none the wiser." Badenoch urged the chancellor to avoid tax hikes and adopt Conservative proposals, such as scrapping stamp duty, to stimulate growth. Meanwhile, Liberal Democrat Treasury spokesperson Daisy Cooper criticized the Budget as a "bitter pill," suggesting Labour had "run out of excuses."
Economic analysts reacted swiftly. The pound dropped to a seven-month low against the dollar, hitting $1.21-its weakest since April-though analysts noted broader dollar strength as a contributing factor. UK borrowing costs initially dipped during Reeves' address but later climbed slightly above pre-speech levels.
Forecasts and fiscal rules
The Resolution Foundation, a think tank with Labour ties, argued that avoiding changes to VAT, National Insurance, or income tax "would do more harm than good." Its analysis suggested Reeves may need to raise £25 billion, proposing a 1% income tax hike (offset by a 2p National Insurance cut) or extending the freeze on personal tax thresholds to 2030-measures that could generate £6 billion and £7.5 billion, respectively.
Reeves reaffirmed her "iron-clad" commitment to fiscal rules, including reducing debt as a share of GDP within five years and balancing day-to-day spending. The Office for Budget Responsibility (OBR) is expected to downgrade productivity forecasts later this month, potentially adding £20 billion to the chancellor's funding gap. The Resolution Foundation urged Reeves to double her fiscal headroom to £20 billion to "send a clear message to markets" and reduce borrowing costs.
Historical context and risks
Raising the basic income tax rate-a move last attempted by Labour's Denis Healey in 1975-remains politically fraught. Reeves' team reportedly favors a "one-and-done" approach to avoid annual tax adjustments, but public trust in politics is at a low ebb, complicating the narrative that current challenges were unforeseeable. The Institute for Fiscal Studies (IFS) previously warned that insufficient fiscal headroom risks instability, leaving the chancellor "limping from one forecast to the next."
"It is important that people understand the circumstances we are facing, the principles guiding my choices-and why I believe they will be the right choices for the country."
Chancellor Rachel Reeves
What's next?
The Budget, expected later this month, will clarify Reeves' tax and spending plans. With the OBR's updated forecasts looming, the chancellor faces pressure to balance fiscal prudence with growth incentives-while navigating political fallout from potential U-turns.
