Budget Decisions

Rachel Reeves is unlikely to raise income tax and National Insurance standards to avoid breaking her promise to protect “working people” in the Budget. Sky News has obtained an internal definition of “working people” used by the Treasury. Officials have been tasked with protecting the incomes of the bottom two-thirds of the workforce, which in theory means people earning more than around £46,000 could face a budget squeeze.

Protecting Working People

However, this is likely to preclude an increase in the basic rate of income tax and social security, as they would pay more taxes. Rachel Reeves is unlikely to increase these taxes as the Treasury says those earning £45,000 or less are considered “working people”. Sky News understands ministers are still considering whether to break their manifesto promises and those options remain on the table.

Budget Black Hole

Rachel Reeves is facing a budget black hole that could exceed £35bn after the latest forecast from the Office for Budget Responsibility (OBR) was worse than expected. The OBR was expected to reduce expected future productivity rates by 0.1% or 0.2% of GDP. Every additional 0.1 percentage point represents a further £7 billion fall in revenue and a corresponding increase in the black hole the Chancellor must fill in the Budget.

Productivity Downgrade

However, the OBR is now expected to cut future trend growth by 0.3%. This means the black hole created by the downgrade in productivity is around £21 billion. The Chancellor needs to raise around £10bn as the U-turn on social policy, the reintroduction of the winter fuel allowance and other policy changes progress.

Filling the Black Hole

On Monday, the Chancellor also said she would increase headroom – the buffer between her spending projects and the borrowing limited by her budget rules. This is likely to cost a further £5bn to £10bn to get them out of the doom loop "cycle" which Ms Reeves admitted to Sky News she was at risk of getting stuck in. That means the total size of the black hole that likely needs to be filled is around 35 to 40 billion pounds. Sources insist this figure is ahead of the OBR’s final forecasts and is therefore subject to change. The Treasury said it does not comment on tax measures or the size of the black hole.