Reeves eyes up to £40bn in tax rises and spending cuts in Budget

Rachel Reeves is looking to make up to £40 billion of tax rises and spending cuts in this month’s Budget as the Government seeks to avoid a return to austerity, it is understood.

The Chancellor told ministers in a Cabinet meeting that plans to fill the “£22 billion black hole” she has repeatedly cited in the UK’s finances will be enough only to “keep public services standing still”.

The Treasury is understood to have identified a far larger £40 billion funding gap which Reeves will seek to plug to protect key departments from real-terms cuts and put the economy on a firmer footing.

Sir Keir Starmer has refused to rule out an increase in employers’ national insurance contributions at the Budget but insisted Labour would keep its promise not to raise taxes on “working people”.

He has repeatedly warned of “tough decisions” to be made when Reeves sets out the plans on 30 October.

Labour promised in its manifesto not to raise taxes on “working people”, including income tax, VAT and national insurance, and the Chancellor has vowed there will be no return to austerity under the new administration.

But the Government has faced questions on whether the commitment not to raise national insurance covered employers’ contributions as well as those by employees.

Businesses have warned that raising their contributions would operate as a “tax on jobs”.

Experts have argued that ministers need to find £20 billion to avoid cuts to so-called “unprotected” departments pencilled in by their Conservative predecessors, along with billions more to prevent a sharp fall in investment spending.

Some of that could come from changing the measure the Government uses to calculate debt, but economists have suggested that some tax rises are all but inevitable to prevent a squeeze on day-to-day spending.

Institute for Fiscal Studies (IFS) Chief Paul Johnson said that £40 billion worth of hikes alone would be “extraordinary” and that eventually the Government would need to target income tax if it went down this route.

“If we get tax rises on that scale, that really will be extraordinary – I mean, unprecedented,” he told BBC Radio 4’s Today programme.

“Forty billion pounds is a big number, you can get there relatively easily actually in terms of the scale of additional spending that will be required down the line.

“Some of that can be covered by slight changes in the fiscal rules, some of that will be covered by some of the tax rises the party is already intending.”

But he added that a “significant” amount would still be left over even after these measures, telling the show: “If they’re looking for £20 or £30 billion of tax rises, in the end, they will have no choice but to do something with income tax.”

It comes as new figures released on Wednesday showed inflation dropped below the Bank of England target rate last month for the first time since April 2021.

The Office for National Statistics (ONS) said Consumer Prices Index (CPI) inflation fell to 1.7% in September, from 2.2% in August.

Johnson said there was “good and bad news” for the Government in the latest figures.

While the cost of the benefits bill will be lower than it would have been had inflation climbed, less revenue will be raised through fiscal drag – the process by which frozen tax thresholds pull people into paying a higher rate.

A Treasury spokesperson said: “We do not comment on speculation around tax changes outside of fiscal events.”