The Chancellor is facing growing calls to ‘bite the bullet’ and raise the basic rate of income tax in the November Budget. This would carry huge economic and political risks, but Rachel Reeves may have left herself with no choice.

It is already likely that the freeze on personal tax thresholds will be extended for another two years. This ‘stealth tax’ increase would drag even more people into paying the higher rates of income tax – or paying this tax for the first time.

However, some commentators are recommending that the basic and other rates of income tax should be increased too. They include the influential Resolution Foundation whose former boss, Torsten Bell, is now playing a key role in drawing up the Budget.

The HMRC ready reckoners suggest that 1p increases in the basic, higher and additional rates would raise a total of around £10 billion a year, with almost all of this (£8 billion) coming from the increase in the basic rate.

There is an obvious political problem. It is impossible to see how raising income tax could be squared with the 2024 manifesto commitment that “Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT”.

The Chancellor has already acknowledged that extending the freeze on personal tax thresholds would “hurt working people” and therefore break the promise made in the manifesto. She said just this when dismissing the option in her October 2024 Budget speech.

Nonetheless, the scale of the fiscal crisis means that almost nothing can be ruled out. The Chancellor may now have to find another £30 billion in the Budget to meet her fiscal rules.

Of this, some £20 billion is likely to reflect a downgrade of the Office for Budget Responsibility’s forecasts for productivity growth, which have looked too optimistic for many years. But another £5 billion could be needed to replace planned welfare savings which have now been abandoned by Labour, and another £5 billion for the higher cost of government borrowing.

If the Chancellor does decide to raise income tax to help fill this gap, there are four factors that might limit the damage – at least politically.

First, she could try to blame the Conservatives (again). Rachel Reeves might argue that the manifesto pledge must be broken because the OBR has only now scored the full extent of the productivity slowdown under the previous Government. In other words, “the legacy of 14 years of Tory rule was even worse than we thought”.

However, Labour has played this card before. The tax rises and other measures announced last year were already supposed to have repaired the public finances and “fixed the foundations”. Can the Chancellor get away with this line twice?

Moreover, the OBR’s reassessment of the prospects for growth would be about the future, not the past. It would be damning if the OBR fails to give any credit for Labour’s attempts to boost the productive potential of the economy, including the large increases in public investment.

Indeed, any good that the government is doing in some areas – such as planning reforms and smarter regulation of financial services – is being more than offset by policies which are pulling in the opposite direction – notably the Employment Rights Bill and the whole ‘net zero’ agenda.

Second, the Chancellor could try to argue that there is no alternative, or at least that other tax increases would be even more damaging. A blanket rise in income tax might be less harmful for the economy in the long run than measures that discourage investment, entrepreneurship, and job creation. But taxes would not have to rise as far – or at all – if the Labour government had a real grip on spending, including the spiralling welfare bill.

Third, she could use some of the additional revenues to protect the most vulnerable, for example by lifting both the two-child limit and the overall cap on household benefits. This might at least play well with Labour’s core supporters. However, the welfare bill would then be even higher.

The Resolution Foundation proposes offsetting a 2p increase in Income Tax rates with a 2p reduction in employee National Insurance, spreading the burden more evenly while still raising about £6 billion. However, overall taxes would still rise.

Fourth, while such a clear breach of the manifesto commitment could shred any remaining credibility with the voters, the willingness to take unpopular decisions to balance the books might at least restore a little credibility with the bond markets. This could deliver some additional benefits in the form of lower borrowing costs.

All this, though, is clutching at straws. Resorting to an increase in the basic rate of income tax would be an epic policy failure – whichever way you look at it. The fact that this option is being discussed at all shows how big a mess we are in.

This piece was first published by the Daily Telegraph on 27 September 2025

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• Budget
• financial markets
• Fiscal Policy
• Politics
• Taxation
• UK economy