That’s the stark reality facing Rachel Reeves today – and beleaguered taxpayers. It’s the only way she can balance the books. In last year’s Budget, she hiked taxes by £40billion and borrowed £30billion, and still couldn’t make ends meet.
Yesterday, consensus was that she’d have to come back for another £30billion in her Budget on November 26. Based on that, I crunched some numbers, and came to the conclusion that she would have to break a Labour manifesto promise and hike one of the big three taxes: income tax, national insurance or VAT.
That was the nightmare scenario yesterday. Today, it’s even worse.
Economists have done their sums and it’s not £30billion Reeves needs to find. Instead, it’s an unthinkable £50billion.
That’s what Rob Wood, chief UK economist at Pantheon Macroeconomics, says Reeves must now raise to meet her “iron-clad” fiscal rules.
Reeves claimed to have inherited a £22billion Budget “black hole” from the Tories. She’s now more than doubled it. In just 15 months.
It’s about the only measurable thing she’s achieved in her calamitous spell at the Treasury. And now we’re going to pay for it.
Reeves has flatlined the UK economy by destroying growth, hiking taxes, battering business confidence and failing to rein in spending.
Latest numbers from the Office for Budget Responsibility show productivity growth has now collapsed, slicing billions off future tax revenues.
Reeves’s position is catastrophic. Which means only one thing. She’ll have to drop a blockbuster tax bomb on the country, and Labour’s reputation. How? By hiking income tax.
I don’t mean quietly extending the freeze on thresholds until 2030, though that’s already a near-certainty.
Reeves will have to do what no Chancellor has dared for half a century: increase the basic rate of income tax itself.
With more than 30million workers and three million pensioners paying it, no other tax that delivers that kind of firepower. It’s the biggest of all, worth 30% of total Treasury revenues.
Forget all the talk about taxing those with the “broadest shoulders”. Reeves’s crisis has gone way beyond that. She’ll have to tax everybody she can. Arms, legs and all.
Labour’s electoral vow not to raise income tax would be in tatters. And voters won’t forgive. Even then, it still won’t plug her £50billion gap.
Every penny on basic rate tax brings in roughly £8billion. Which means that 1p in the pound won’t be anywhere near enough.
To raise £50billion, she’d need to slap 6p on the basic rate of income tax – political suicide. So she’ll cast her net wider.
That could mean breaking a second manifesto promise by raising VAT, with every percentage point increase adding another £8billion or so to the coffers.
But that would drive up inflation, hammer businesses and pile more misery on households already struggling with higher bills. And it still won’t be enough.
Alternatively, Reeves could reverse the brace of 2p cuts in NI that former Tory Chancellor Jeremy Hunt sneaked in before the last election to make life harder for Labour. That would also breach a manifesto pledge.
Either way, she’ll also have to plough into pensions, inheritance tax, capital gains, property you name it. And that’s after promising last November that she wouldn’t increase taxes at all this time.
Reeves’s choices are grim. Whatever she does will crush growth, funnel more cash into the unproductive state, and still fail to fix the mess.
The blast will blow everything up, including the UK economy, Rachel Reeves’s career and the Labour Party’s reputation. But it’s taxpayers who’ll feel the full force.
