The Office for Budget Responsibility's downgraded productivity forecasts have left the Chancellor with limited options as she looks to address a £22bn gap in the public finances as the Budget nears. Rachel Reeves is reportedly contemplating an increase in income tax, despite previous assurances that income tax, VAT and National Insurance would not be increased. A 2% increase in income tax would reportedly see National Insurance reduced by the same rate. Raising the basic rate by 1p would raise over £8bn a year by 2028/29, according to HMRC figures, while adding 1p to higher rate tax to make it 41p would raise £1.2bn and increasing the 45p rate to 46p one would only raise £230m. Alex Race, a chartered financial planner at Rathbones, notes the possible impact of the freeze on tax thresholds, saying: "A 1p hike in income tax might seem modest at face value, but its impact is amplified by the scourge of fiscal drag." The Institute for Fiscal Studies has warned that not raising income tax, National Insurance, or VAT would have "particularly damaging effects," while business groups, including the Institute of Directors, other think-tanks and City analysts, agree that raising income tax would have the least damaging implications for growth.
