Reeves lays groundwork for tax rises in surprise pre-Budget speech

Rachel Reeves made a surprise pre-Budget speech this morning, addressing speculation that she will break Labour’s manifesto commitments on tax rises.

While Labour had previously pledged not to raise income tax, VAT or national insurance for employees, the Office for Budget Responsibility is expected to downgrade its productivity forecasts ahead of the Budget, which could leave a £20bn hole in the public finances.

During her Downing Street speech this morning, Reeves refused to rule out tax rises to plug a hole in the public finances, stating that “easy answers” to fix economic issues would be “irresponsible”.

She added: “There is a lot of speculation about the choices I will make. I understand that – these are important choices that will shape the future of our country for years to come.

“I want people to understand the circumstances we are facing, the principles guiding my choices – and why I believe they will be the right choices for the country.”

She stopped short of revealing specific Budget policies, adding: "I will set out the individual policies of the Budget until the 26th of November. That’s not what today is about. Today is about setting the context up for that Budget.”

Discussing the increasing challenges the UK economy faces, Reeves said: “The continual threat of tariffs has dragged on global confidence, deterring business investment and dampening growth.

“Inflation has been too slow to come down, as supply chains continue to be volatile, meaning the costs of everyday essentials remain too high.

“And the cost of government borrowing has increased around the world, a shift that Britain, with our high levels of debt left by the previous government, has been particularly exposed to.”

Rob Morgan, chief investment analyst at Charles Stanley, said: "Today’s speech from Chancellor Rachel Reeves confirms what we previously suspected: that significant tax rises lie ahead in this year’s Budget and that areas previously ringfenced by manifesto promises are no longer out of scope.

"While bond markets may have been reassured by Reeves’ further commitment to her fiscal rules, as well as her acknowledgement of the importance of fostering growth, taxpayers will be left feeling distinctly uneasy.

"Only the major taxes have the revenue-raising potential to fill a large portion of the hole in the government’s finances. With unwanted inflationary consequences of raising VAT and corporation tax a likely no-go area with many businesses already struggling, it leaves income tax and national insurance firmly in the cross hairs for a broad increase.

"In addition, we can expect a series of other measures targeting wealthier individuals. Yet the Chancellor will need to be exceptionally careful any moves do not backfire once their impact on investment and growth are considered."

Rachael Griffin, tax and financial planning expert at Quilter, commented: "Rachel Reeves’s pre-Budget speech was all about preparing the ground for some painful measures later this month. She knows this Budget will define her credibility, and her message today was clear that Britain’s finances are in a worse state than many realise, and everyone will be expected to play their part in putting them back on track.

"Reeves was at pains to distance herself from the politics of austerity, arguing that deep cuts and short-term fixes are what weakened the country’s economic foundations in the first place. But while her argument against renewed austerity will appeal to many scarred by the last decade, it also lays the groundwork for a different kind of pain, which is higher personal taxes to rebuild public finances. She’s made it clear she is happy to be unpopular if it helps secure public finances.

"Her insistence that ‘easy answers’ are off the table is a warning that there will be few giveaways in this Budget. The Chancellor is trying to convince both markets and the public that fiscal discipline can coexist with fairness, but for households already facing high borrowing costs and squeezed budgets, the idea of contributing more will still be a tough sell.

"This was a speech designed to project authority and honesty, not to win popularity. The real challenge for Reeves will come when she has to translate that rhetoric into decisions that feel credible to investors but also tolerable for working families."

Paul Barham, head of international private client tax at Forvis Mazars, added: “Despite all the rumours, the government has limited options in the Autumn Budget. Unable to cut spending, some tax increases are almost certain. 

“Tax by stealth is more likely than any large-scale overhaul, due to promises made in the manifesto and repeated at the Labour party conference not to increase VAT, Income Tax or National Insurance. We can expect to see a continued freeze on income tax thresholds, a subtle but effective way to increase revenue as wage inflation pushes more people into higher tax brackets. The government may also close tax advantage schemes that have so far avoided attention, such as non-AIM Business Relief investment schemes. 

“Loophole closing will also be in the government’s sights with potential changes to Capital Gains Tax (CGT) exit charge on individual assets as more taxpayers consider moving overseas to mitigate this burden. Designed to prevent people from avoiding tax on asset gains by moving abroad, it could be introduced on unrealised gains when an individual or company ceases to be a UK resident. Such is the case already on trusts and business assets. Given the exodus in advance of the abolition of the non-dom regime, not having introduced it at the same time will seem like a missed opportunity but it will still have the effect of ensuring gains created in the UK are taxed here.

“Finally, look out for tighter rules around inheritance tax (IHT). This could include extending the "seven-year clock" for gifts to become IHT-exempt or capping the total amount of tax-free gifts over a lifetime. While the exact details are still unknown, the overall direction is clear: tax rises are coming and will impact financial planning.”