🔗 Share this article

Chancellor Rachel Reeves is set to prepare the groundwork for a budget that may include tax increases, potentially breaking the party's election promise on income tax.

In what's described as a “forthright” speech about the difficult choices facing the government, Reeves will confront the difficult fiscal choices facing the administration.

Financial Markets

The speech is set to occur as Tuesday market opening, timed with the opening of financial markets.

Reeves is expected to commit to delivering equitable decisions in this month's budget but will notably avoid restating her election promise of no rises in income tax, value-added tax or NI contributions.

Prime Minister's Perspective

Keir Starmer told Members of Parliament on Monday evening that the budget would be “a government budget” built on Labour values” and pledged it would safeguard healthcare, reduce debt and ease the cost of living.

Starmer attributed the challenging circumstances to the lasting effects of earlier economic approaches, including spending cuts, Brexit arrangements and COVID-19 on Britain's productivity.

Parliamentary Reaction

Addressing sceptical MPs concerned about potential manifesto breaches, the Prime Minister acknowledged there would be “difficult but equitable” decisions.”

He contrasted their strategy with what he called spending cuts under other parties' plans.

Parliamentarians consistently pressed Starmer on whether the budget would remove the two-child benefit cap, applying described as “coordinated pressure” on the government.

Financial Background

Senior strategists are understood to be heavily invested in preparing the ground for major changes before the budget announcement.

Officials think that previous budget effectiveness was due to market preparation for investment rule changes and national insurance increases.

While the budget situation remains challenging, some sources suggest the financial outlook is less gloomy than originally forecast.

Budget Considerations

The chancellor is attempting to possibly increase her fiscal headroom while securing funding to tackle the two-child benefits limit and protect health service investment.

There will be a emphasis on reducing the cost of living, with consideration of reducing sales tax on home energy costs and environmental charges.

Revenue Measures

An influential thinktank has urged raising personal taxation by 2p while reducing NI contributions by the same amount.

This strategy could generate £6bn mostly from increased burden on those who don't pay NI, such as pensioners and landlords.

The Resolution Foundation also suggests additional revenue measures, including extending the freeze on income tax thresholds, increasing investment taxes and eliminating investment tax advantages.

Political Considerations

Inside government, key officials believe the primary concern is the reaction of Labour MPs to any manifesto breach.

A government official stated: “Should we proceed down this path we need to be completely transparent about the destination.”

A different official stressed the need to demonstrate tangible improvements to people as a result of their taxes going up.

Messaging Approach

Reeves will commit to address speculation about her economic plan, though she is not expected to make specific policy announcements.

In her speech, Reeves will stress making decisions necessary to deliver strong foundations for the country for this year and the future.

The budget will be led by government values of fairness and prosperity, centered around protecting the NHS, lowering national debt and improving the living standards.