Rachel Reeves is looking at income tax increases to fill the $30bn budget gap

Chancellor Rachel Reeves is considering breaking one of Labour’s election campaign buttons by raising income tax in next month’s budget to help bridge the $30 billion shortfall, according to senior government sources.

Three figures close to the budget process told the Guardian that the talks between the wife and no 10 have increased in recent weeks, finding out how they will deliver continuous income without returning to raising taxes later in Parliament.

Although no final decision has been made, advisers believe that an increased income tax would be the only way to raise enough money to restore the government’s finances and create a “Heady Hoer” for future tax cuts.

The financial challenge has been deepened by the decision of the budget burden (OBR) to reduce the UK manufacturing forecast, a move that is expected to cost the treasury around £ 20 billion a year.

Reeves must also find money to reverse the cut of the winter allowance, the planned reduction of social benefits, and end the cap on the two-child benefit – all measures previously criticized by backbenchers.

Although the falling gilt yield reduced the government’s spending on debt by an estimated $2-3 billion, the payback is limited. Small measures, such as increasing the national insurance of partners in the laws and accounting practices, are expected to do more than £ 2 billion.

Sources say the Treasury is discussing several configurations of income tax reforms:
• A 1P rise in the base rate, from 20p to 21p, would raise around £8.2 billion a year, but could be fueled by public anger at the cost recovery.
• An increase of 1P at a higher rate, from 40P to 41p to receive income at $50,271, will generate about 2.1 billion.
• A further rate rise for those earning more than £125,000 could raise £230 million per penny.

Reeves is said to be torn between keeping his promise to protect working families and making sure public finances meet his tough fiscal rules. One senior financial source said:

“There is a live debate about how much money we want for the kings. If we aim to rise, we may not have it and we have to improve the income tax now.”

While the Chancellor and Prime Minister Keir Starmer continue to insist that the Labor Manifesto commitment is “standing”, they have given up on tax cuts clearly.

Reeves is well aware of the political fallout that would come from failing his previous position, especially after he broke another promise last year to increase national insurance. Advisers say he wants to ensure that any new monetary policy is dismantled as “a single, responsible measure to protect economic stability.”

The Budget Board – Together with Finance Minister Torsten Bell and the Prime Minister’s chief economic adviser Dame Minouche Shafik – is currently weighing up competition.

One proposal, backed by the Resolution Foundation, would see the basic rate of income tax rise by 2p while National Insurance contributions COUNT by 2p, effectively placing the burden on pensioners and landowners, who do not pay.

Ruth Cudice, director of the think tank, said:

“Of all the big taxes, putting income tax in line with the UK’s current economic woes of low growth and sticky inflation

Next month’s budget in the month of November 26 is shaping up to be one of the most politically charged in recent years. Reeves is under pressure to prove his fiscal discipline to the markets while maintaining the government’s credibility with those voters still frustrated by years of austerity and rising costs of living.

As one Treasury official put it: “Politics is bad. It’s the things that make the right thing.”