The Chancellor has stated that she will make “necessary choices” in her upcoming Budget and refused to say she would keep to Labour’s manifesto pledge on tax rises.

In a pre-Budget speech delivered this morning, Rachel Reeves acknowledged there had been “a lot of speculation” surrounding the choices she will make in her second Budget, which will be delivered on Wednesday 26 November.

Reeves set out the difficult economic backdrop she was dealing with, stating that the world had “thrown more challenges our way”, since the last Budget, as she highlighted high debt levels, low productivity and stubborn inflation.

However, the Office for Budget Responsibility is widely expected to downgrade its productivity forecasts for the UK at the end of the month, potentially adding as much as £20bn to the amount the Chancellor will need to find.

Government borrowing – which is the difference between public spending and tax income – reached £20.2bn in September, the highest level recorded for the month in five years, driven by an increase in debt interest payments.

The Chancellor said that £1 in every £10 of taxpayers money is being spent just on debt interest, rather than paying down the debt.

“No accounting trick can change the basic fact” that there are limits to how much the Government can borrow, Reeves added, as she revealed the UK’s national debt now stands at £2.6trn – or 94% of the national income.

Figures from the Resolution Foundation have forecast that tax rises of £26bn are “likely to be needed”, as the think said the scale of this means that avoiding touching VAT, income tax or national insurance “risks doing more harm than good”.

The Foundation stated that now is “not the time” to raise VAT as it will “fuel the UK’s high inflation problem”, and that with employer National Insurance contributions the focus of last year’s Budget, the Chancellor should turn this time to Income Tax.

Reeves said she was aiming to deliver a Budget “with fairness at its heart”, and one option she
may be considering is the one proposed by the Resolution Foundation – which would see Income Tax raised by 2p in the pound but reducing employee National Insurance by an equivalent 2p.

The think tank has estimated this would raise £6bn overall while still protecting workers from these tax rises, although such a move would also break a Labour manifesto pledge.

“The Chancellor should look to make sensible tax reforms to car taxes, dividends and capital gains,” research director at the Resolution Foundation, James Smith, commented.

“Switching 2p of employee National Insurance onto Income Tax would raise £6bn while protecting workers’ wages. Together, this will help to deliver a decisive Budget centred around prices, payslips and poverty reduction, and that shifts the focus away from black holes and back onto boosting growth.”

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