Rachel Reeves, Labour’s Shadow Chancellor of the Exchequer, has foreshadowed proposing an extension of the freeze on income tax thresholds. This shift is meant to raise additional revenues for the UK treasury. This freeze, imposed initially by Chancellor Jeremy Hunt, is currently due to come to an end in 2028. Extending it for another two years has turned into the easiest path. This political move is an effort to more comprehensively address the growing budget deficit.
The income tax threshold freeze has more serious long-term consequences for taxpayers. It drags more people into the top tax bracket. As a result, the number of individuals who must contend with this higher tax rate grows. That’s because this year an estimated half a million new taxpayers will enter this category. This step will up that figure to nearly 7 million. The freeze is estimated to raise around £8 billion per year. This new, substantial revenue will allow the commonwealth to fund its priorities and address its fiscal responsibilities.
Reeves is under increasing and intense pressure to identify at least £20 billion to plug the holes in the government’s books. The urgency has become more acute. Labour leader Keir Starmer’s recent about-face on welfare cuts has left a gaping fiscal chasm. The announcement of the reversal of cuts on disability benefits increases annual costs by an additional £3 billion by 2029-30. This move just adds another layer to the already complicated fiscal landscape.
Mujtaba Rahman speculates that Reeves will have to make a combination of modest cuts with revenues to make up the funding. Simon Wells agrees, noting that extending the income tax threshold freeze is still one of the most realistic and best options left on the table.
“The threshold freeze is obviously the politically easiest thing to do,” noted Paul Johnson, director of the Institute for Fiscal Studies. He noted that even small changes could raise a lot of money. He continued, to find that £10 billion or £20 billion without putting up income tax or VAT is the hard part.
The Office for Budget Responsibility (OBR) is set to downgrade its economic growth forecasts in next autumn’s release. This amendment might put a serious dent in Reeves’ approach.
Avoid reading too much into one month’s data,” Reeves urged. It’s just one factor among many that will draw a fresh line under the next forecast from the Office for Budget Responsibility.
The significance of these fiscal choices go beyond the maths. They threaten to completely alter the lives of millions of UK taxpayers. As more individuals are drawn into higher tax brackets due to the threshold freeze, public sentiment may shift, placing additional pressure on Labour’s leadership.
According to Treasury sources, the reversal on welfare will not greatly affect short-term fiscal alterations. It makes the government’s long-term budgeting plans even more confusing. “This isn’t new,” one affected source marveled. That’s only a £3 billion to £4 billion adjustment by the end of the period. They warned that any worse changes from the OBR would increase fiscal pressure on Reeves and her administration.
Policymakers are preparing themselves for such announcements in the months ahead. In the meantime, Reeves and her team are expertly treading the waters of a difficult political environment with daunting, yet galling, competing priorities and needs.