🔗 Share this article

Rachel Reeves is set to prepare the foundation for an economic plan that may include tax increases, potentially breaking Labour's campaign pledge on income tax.

During what's being called a “forthright” address about the difficult decisions ahead, Reeves will address the difficult fiscal choices confronting the government.

Market Timing

The speech is scheduled for Tuesday market opening, coinciding with the opening of financial markets.

Reeves is expected to promise to make equitable decisions in this month's budget but is expected to omit restating her manifesto commitment of no rises in income tax, VAT or NI contributions.

Prime Minister's Perspective

Keir Starmer told MPs on Monday night that the economic plan would be “a Labour budget built on Labour values” and promised it would safeguard healthcare, lower borrowing and ease the cost of living.

Starmer pointed to the challenging circumstances to the lasting effects of previous government policies, including austerity measures, EU departure terms and COVID-19 on UK economic output.

Parliamentary Reaction

Addressing sceptical MPs worried about potential manifesto breaches, Starmer acknowledged there would be “difficult but equitable” decisions.”

He differentiated the government's approach with what he called a return to austerity under alternative approaches.

MPs repeatedly questioned Starmer on whether the economic plan would remove the benefit limitation, applying what one MP called “coordinated pressure” on the government.

Financial Background

Senior strategists are understood to be focused on laying the foundation for significant adjustments before the budget announcement.

They believe that last year's success was due to market preparation for investment rule changes and national insurance increases.

Although the fiscal landscape remains challenging, some sources suggest the financial outlook is more positive than originally forecast.

Budget Considerations

Reeves is attempting to potentially double her fiscal headroom while securing funding to tackle the child benefit restriction and protect NHS capital spending.

There will be a focus on reducing the living costs, with consideration of cutting VAT on home energy costs and some green levies.

Taxation Options

A prominent research organization has recommended raising personal taxation by two pence while reducing NI contributions by the same amount.

This approach could generate six billion pounds primarily through increased burden on those who don't pay NI, such as retirees and property owners.

The Resolution Foundation also proposes additional revenue measures, including extending the freeze on tax brackets, raising dividend tax and closing capital gains tax loopholes.

Political Considerations

Within the administration, senior figures believe the biggest risk is the reaction of party members to any manifesto breach.

One minister stated: “If we are going down this road we need to be absolutely clear about the destination.”

Another source emphasized the need to show direct benefit to people as a consequence of increased taxation.

Communication Strategy

Reeves will commit to address speculation about her economic plan, though officials don't anticipate to make specific policy announcements.

In her speech, she will emphasize making choices necessary to build economic stability for the economy in the short term and the future.

The budget will be guided by government values of fairness and prosperity, centered around protecting the NHS, reducing government borrowing and improving the living standards.