"Public services now need to live within their means," Rachel Reeves declared to a group of business leaders during the CBI’s annual summit in November, reaffirming her position: "because I’m really clear, I’m not coming back with more borrowing or more taxes."
The Chancellor's remarks at that time were aimed at providing reassurance to the private sector following the backlash from her first Budget release in October. This maiden financial plan saw more than £40bn of charges imposed on businesses and the wealthy—a move that came as a shock despite Reeves' extensive efforts to court executives before the election, as reported by .
Nevertheless, Reeves seemed to strike a different note weeks later when she refrained from reiterating those same declarations in the House of Commons later in November, instead stating that the government will "never have to repeat a Budget like that because we won’t ever have to clear up the mess of the previous government ever again."
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Even Keir Starmer, when confronted by Conservative leader Kemi Badenoch, subtly shifted away from Reeves's stance, commenting that he was "not going to write the next five years of Budgets here at this despatch box".
Now facing the prospect of tightened fiscal constraints, both Reeves and Starmer are grappling with financial realities. There's a growing consensus among analysts that escalating gilt yields might obliterate the £9.9bn budget cushion that Reeves had earmarked following her Budget announcement.
The Treasury has affirmed that the "non-negotiable" and self-imposed fiscal rule to match government spending with tax receipts will remain in force. Should there be a breach, the Chancellor would have no choice but to source funds from alternative avenues, potentially indicating future tax increases.
With a strained relationship with many in the business community and restricted by a commitment not to raise taxes on "working people", the government's routes for generating revenue are somewhat narrow.
Prime Minister Keir Starmer, alongside Chancellor Rachel Reeves, has caused unease amongst some business leaders following a spate of tax raises announced at the recent Budget.
So which taxes could the Chancellor actually raise?
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The promise made towards "working people" effectively eliminates any adjustment to approximately 46 percent of the government’s total tax income, which includes income tax, national insurance contributions for employees, and Value Added Tax (VAT). An additional vow not to elevate corporation tax beyond its existing rate of 25 percent maintains another eight percent of tax revenues at their current figures.
Taken together, Chancellor Reeves is precluded from altering 54 percent of the taxation base. However, Capital Economics analyst Ashley Webb outlines five potential tactics that Reeves could employ:.
1. Increase the taxes she hasn’t previously excluded.
Reeves has not dismissed the possibility of increasing levies such as capital gains tax, alcohol and tobacco duties, air passenger duties or vehicle excise duty.
Despite the government's pre-election dismissal of a "mansion tax", Webb suggests that another option could be to raise stamp duty and council tax on high-value and second homes.
However, these measures could have significant political repercussions. Prior to the Budget, rumours of a potential increase in the capital gains tax rate beyond 30 per cent sparked outrage among investors, who argued it would undermine the incentive to invest in the 海角视频.
Further charges on second homes could also lead to accusations of Reeves targeting the affluent and aspirational. As Webb notes, adjustments to these taxes would only yield marginal additional revenue, as they collectively account for just 11 per cent of total tax receipts.
2. Tweak existing policies
Another approach could involve modifying existing tax relief policies, such as ISAs and pensions. This could include reducing the amount of tax relief on pension contributions for high earners or abolishing the lifetime ISA.
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However, this could raise concerns about the 海角视频 exacerbating its own investment stagnation. Encouraging investment into British companies has been a central objective of the City reform agenda, and discouraging investment from pension funds is likely to cause unease.
Webb suggests another approach the government might consider is prolonging the freeze on personal income tax thresholds beyond 2027/28 to 2029/30.
3. Widen the next of existing taxes
Reeves could look to widen the net of existing taxes, as evidenced by her recent policy to impose VAT on private school fees from the start of this year.
Expanding VAT to currently exempt products and services is a strategy that comes with historic caveats, Webb points out. "The ‘pasty tax’ debacle in 2012, when the then Chancellor George Osborne raised VAT on ‘hot takeaway food’ before quickly reversing it, suggests this could be difficult to do," he notes.
Webb also proposes that "Another option could be expanding the base on which national insurance tax is charged, for example by including investment income in addition to earned income."
4. Create new tax bases
To create new revenue streams, Webb identifies a significant opportunity for the Chancellor to save funds by halting interest payments on the £710bn of central bank reserves held at the Bank of England by commercial banks.
Although Reeves has indicated no intention to pursue this course, should interest payments linked to the Bank Rate cease on all reserves, Webb cites Capital Economics’ estimation of up to £34bn a year in potential savings for the government.
However, any potential boost could be curtailed by the expectation of a rate loosening cycle this year. If the base rate is cut to 3.5 per cent next year and the Bank of England continues to reduce the amount of reserves by selling its gilt holdings as part of a programme of quantitative tightening, perhaps to around £500-550bn by the end of 2026, the potential tax-take may be reduced to around £20bn a year, Webb says.
"Moreover, to maintain its ability to use Bank Rate as a monetary policy tool, the Bank of England would probably introduce tiered reserve remuneration rather than paying no interest at all, which would further reduce the potential tax revenue," he adds. "Even so, this would still be a chunky source of revenue for the government. As this would effectively be a tax on banks, though, at the margin it may weigh on the supply of credit."
5. The nuclear option: hike taxes on working people
Critics of the government say it has already broken a manifesto pledge after hiking national insurance contributions for employers, despite saying it would not change the levy in its manifesto. However, breaking its pledge not to change income tax, VAT or national insurance contributions from employees would present entirely new challenges politically for the government.
Even so, small tweaks to these charges could raise big sums. A one percentage point rise in each would raise £9bn, £7.3bn and £4.7bn respectively by 2026/27, according to Capital Economics’s calculations.
However, it remains to be seen whether Reeves views the situation as dire as that.