In April 1975, the Labour chancellor Denis Healey sought to grip the UK’s runaway inflation and rising unemployment rates – an economic crisis triggered by the shock rise in global oil prices – by raising the basic rate of income tax.
Now Rachel Reeves, faced with her own set of difficult economic circumstances, including a multibillion-pound budget shortfall, is contemplating the same remedy – breaking a 50-year taboo by becoming the first chancellor since Healey to hike the basic rate of income tax.
It would be a nuclear option at any time, let alone in circumstances where Labour won power a year ago on a cast-iron promise not to raise income tax, national insurance or VAT.
In an unusual speech delivered on Tuesday just as the financial markets opened, three weeks before the budget will be announced, the chancellor began to roll the pitch for doing just that.
Final decisions have yet to be taken, but proponents of a manifesto-busting tax rise argue it will be less politically damaging than a smorgasbord of minor measures.
There is some evidence to support this view, although on the face of it, polling consistently shows that raising the basic rate of income tax, national insurance or VAT would be highly unpopular.
Matthew Smith, the head of data journalism at YouGov, said: “Unsurprisingly, people are not keen to see income tax go up. Our polling shows that increasing the basic rate of income tax is a highly unpopular suggestion – two-thirds (65%) of Britons would oppose such a move, while about one in five (22%) say they’d support it.”
But detailed findings by Persuasion UK this week suggest there is a willingness among voters to forgive ministers for breaking their tax promises if this leads to tangible improvements in the cost of living and public services.
Steve Akehurst, the director of Persuasion UK, which carried out the research, said: “To the essay question of, ‘how unpopular would it be?’, the answer is not popular. But you are choosing between different flavours of shit sandwich.”
“It’s a question of what’s least unpopular: is it raising taxes or is it failing on public services and the cost of living? While you do pay a penalty for raising taxes you promised not to, it’s lower than the penalty for not fixing the NHS, crime or indeed not reducing child poverty.
“If they can avoid failure on these things without putting up these taxes, then that’s what they should do. But if it’s a crude choice between the two, then the least worst option is breaking the manifesto.”
Akehurst added that raising the basic rate of income tax was especially risky as people would notice the decrease in their take-home pay – it is more visible than a rise in VAT or fiddling with tax thresholds or the tax-free allowance.
While there is some evidence that raising VAT – itself a very unpopular form of taxation – carries a smaller political penalty, the Treasury is understood to be concerned about the impact this would have on inflation.
The chancellor already raised national insurance contributions (NICs) for employers in what she said was a one-off measure last year, and was accused of slapping a tax on jobs. Coming back now to raise employees’ NICs at a time when unemployment is ticking up seems a political impossibility.
Raising income tax generates the serious sums that the chancellor requires. Increasing all rates of income tax by 1 percentage point would yield nearly £11bn a year by 2029–30, according to the Institute for Fiscal Studies, with the bulk of this revenue coming from increasing the basic rate.
To some extent, the public has already begun anticipating a major tax rise. YouGov polling published last week found that 42% of voters thought Reeves was preparing to increase income tax, compared with 22% who thought she was not and 27% who said they did not know.
But others argue it would be wrong to underestimate the political damage of such a move. Research over the summer found that the belief Labour had broken or was not delivering its promises was the top reason voters who backed the party in 2024 were now deserting it.
Pollsters, as well as Labour MPs and cabinet ministers, say all this should serve as a hefty warning to Reeves. “The worst place they can end up in is to raise taxes by enough to annoy people, but not enough that they deliver on anything that people care about,” Akehurst said. “If they raise income tax solely to fill in an OBR black hole, that is probably the worst scenario.”
In other words, implementing a manifesto-busting tax rise without successfully changing the things people most care about – help with the cost of living, improvements to the NHS, tackling Channel crossings and reducing child poverty – would see Labour plumb even lower depths of unpopularity than it already is.
