Chancellor warned she will have to break pledge on tax

Rachel Reeves has been warned she faces having to break Labour’s manifesto pledge not to increase taxes on working people after leading economists said “fiddling around” with smaller taxes - like a mansion tax and a gambling levy - would not be enough to fill the black hole in the Budget.

- DAVID MADDOX

The warning has been led by Lord Jim O’Neill, the economist, former Treasury minister and ex-Goldman Sachs chair, who was brought in by Ms Reeves as a top adviser. He told The Independent: “I don’t think fiddling around with smaller taxes any longer is likely to yield much fruit.”

Instead, the chancellor has been told by leading think tanks that, if she wants to maintain her spending plans and fiscal rules on borrowing, she will likely have to raise income tax, VAT or employee national insurance - breaking one of Labour’s key manifesto pledges.

Leading economic think tank the National Institute of Economic and Social Research (NIESR) has estimated that Ms Reeves will be faced with a £41.2bn black hole at her next Budget this autumn. Senior economists, including Prof Jagjit Chadha, who recently stepped down as the head of the NIESR, and Andrew Sentance, a former member of the Bank of England’s rate-setting Monetary Policy Committee, have also suggested the UK may need to go to the International Monetary Fund for a bailout.

While the Treasury dismissed the speculation, the options for Ms Reeves to fill the economic gap appear to be dwindling. During the Spending Review earlier this year, she had headroom of just around £10bn, according to the Institute of Fiscal Studies (IFS), but economic problems caused by wars and Donald Trump’s tariffs have left the UK economy vulnerable.