Income tax rise only way to plug extra £20bn in Budget black hole, economists warn

Raising income tax or slashing public spending is the only way Rachel Reeves can balance her Budget, top economists have warned, after grim news on a key economic indicator left her with an extra £20bn in what was already a sizeable black hole.

- DAVID MADDOX, CAITLIN DOHERTY

The chancellor knew she would be facing a difficult Budget on 26 November, with a gap in the finances of between £30bn and £40bn, but she has been dealt a further blow with the decision by the Office for Budget Responsibility (OBR) to downgrade its productivity forecast - a move that was first revealed by The Independent - which means she must find a further £20bn.

Now, the respected Institute for Fiscal Studies (IFS) has warned that trying to balance the books by raising lots of smaller taxes, instead of breaking Labour's manifesto pledge not to increase income tax, will "cause unnecessary amounts of economic damage".

It comes after the chancellor said she also wants to increase her fiscal headroom above the current £10bn to allow the Treasury to deal with economic shocks, after Donald Trump's tariffs and the ongoing impact of wars in Ukraine and the Middle East left her short following last year's Budget.