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Rachel Reeves has left the door open to raising taxes next month to help plug a fiscal hole, despite previously insisting the UK public finances were on a sound footing and that she would not be “coming back with more tax increases”.
The chancellor’s plans have been blown off course by poor economic data, including flatlining growth, that have threatened to wipe out the £9.9bn margin of error she gave herself against her own fiscal rules in her October Budget.
Reeves is expected to use a statement on March 26 to rebuild that buffer and has signalled that “rooting out waste” in public spending is her first choice. But the Treasury is refusing to rule out tax rises as part of the package. One aide said Reeves was taking “nothing off the table”.
The fiscal outlook could yet improve between now and when the Office for Budget Responsibility produces its final report alongside the March 26 statement, meaning tax increases or harsh spending cuts prove unnecessary. The OBR’s initial forecast last week showed Reeves’ headroom was wiped out.
Asked by the Financial Times whether it could exclude Reeves making tax changes in her March 26 statement, the Treasury failed to do so.
It said: “Our commitment to fiscal rules and sound public finances is non-negotiable. As the chancellor has said, the Office for Budget Responsibility will publish their updated forecast on March the 26th, and she will respond to it then.”
The Treasury added it was committed to one “major” fiscal event a year, the autumn Budget.
Among the options being discussed in the Treasury for next month is a continuation of the freeze on income tax thresholds and allowances beyond 2028, a move also considered but discarded by Reeves at her October Budget.
The Institute for Fiscal Studies think-tank says that freezing income tax thresholds from 2028-29 onwards would bring in roughly £3.5bn — £4bn a year, assuming inflation at 2 per cent or more, if national Insurance thresholds were also frozen.
Treasury officials have variously described the idea as “interesting” and the “obvious thing to do”.
Ahead of the Budget the government briefed that continuing a freeze to thresholds — which began under the Conservatives — would not breach Labour’s manifesto pledge not to raise income tax. Reeves ultimately announced the freeze would end, using it to show a contrast on tax between Labour and the Tories.
Officials say Reeves decided not to keep the freeze in October because she wanted “something positive” to announce.
Paul Johnson, head of the IFS, said that it would be “relatively politically painless”, given that Reeves could announce the change now but reverse it later if the economy improves.
An announcement of the freeze could allow the OBR to include the measure as a positive for the public finances later in the parliament, but would not require immediate legislation. That would help support Reeves’ argument that she will not be doing a full-blown Budget next month.
The Tories had set the threshold freeze to run until 2028. Johnson said: “I’m surprised the chancellor didn’t extend the freeze in the Budget — it would have given them a bit more headroom against their targets.”
However, announcing future freezes in tax thresholds would be seen as in effect a tax rise and still be politically risky for Reeves, given her previous claims to have stabilised the public finances with her £40bn tax — raising Budget last year.
“We have now set the envelope for spending for this parliament,” she told the House of Commons Treasury select committee last November. “We are not going to be coming back with more tax increases or more borrowing.”
While the OBR in October predicted the UK would have headroom of £9.9bn against Reeves’ key fiscal rule, which requires the current budget to be in surplus by 2029, that has been erased by weak growth and higher interest rates, according to people familiar with the matter.
The UK economy mustered just 0.1 per cent quarterly growth in the final months of the year and forecasters including the Bank of England are predicting a weaker expansion in 2025 and 2026 than was projected by the OBR in its October outlook.
If the OBR judges that the weakness will persist, it could reduce the projected size of the economy at the end of the OBR’s forecast period, bearing down on growth in tax revenue and worsening the fiscal situation.
If Reeves is forced to make billions of pounds of savings in March, she has indicated that her principle focus will be on cutting public spending, including the welfare bill, heralding an even tighter government spending round.
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