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The government has given contradictory signals about its vows to spare โworking peopleโ from higher taxes as chancellor Rachel Reeves faces questions about how she will fill a deepening black hole in the UKโs public finances.ย
Darren Jones, chief secretary to the Treasury, on Monday appeared to create room for tax rises in the autumn Budget as he pledged that the โheadline rateโ of key taxes would be unchanged, rather than ruling out wider changes.ย
Reeves gave a broader commitment on Monday, however, as she promised the government would not increase the taxes that โworking people pay โ their income tax, their national insurance and their value added taxโ.
Adding to the confusion, ministers offered contrasting definitions of โworking peopleโ, sparking a debate over who will be spared from the threat of higher taxes.ย
โLabourโs manifesto pledge on tax always left room for interpretation, and subsequent references to โworking peopleโ, โpayslipsโ and โthose on modest incomesโ havenโt added much clarity to whatโs in or out of scope for change,โ said Adam Corlett, principal economist at the Resolution Foundation think-tank.
Economists predict Reeves will need to raise taxes in the autumn Budget as she faces a fiscal hole of ยฃ20bn or more following U-turns on welfare reform and potential downgrades to the Office for Budget Responsibilityโs economic forecasts.
But she tied her hands ahead of last yearโs general election, ruling out increases to the biggest revenue-raising taxes in Labourโs manifesto โ employee national insurance contributions, VAT and the basic, higher, or additional rates of income tax.
While she and fellow ministers insist they are sticking to the manifesto, the tax pledge is being seriously tested by economic reality.
Speaking to the BBC on Monday, Jones appeared to indicate Labourโs commitments are focused on headline rates of tax.
โWe made a very clear manifesto commitment to protect working people in their payslips by not increasing the headline rate of income tax or employee national insurance and not to increase the headline rate of VAT,โ he said. โThat was a very clear promise coming into the election.โ
This could allow the Treasury to keep its standard rate of VAT unchanged at 20 per cent, for example, while broadening the base on which the tax is charged by altering thresholds or reducing the generosity of exemptions from the levy.ย
Reducing the VAT threshold for businesses over time, from ยฃ90,000 to ยฃ30,000, could for example raise around ยฃ2bn for the government, according to Corlett.
There are growing expectations that Reeves will plug the hole in her fiscal plans by extending the freeze on income tax thresholds and allowances, the so-called โstealth taxโย introduced by the Conservatives, beyond 2028.
This too would raise revenue while leaving headline rates of personal tax unchanged.ย
Reeves decided at last yearโs Budget not to extend the freeze, which the Institute for Fiscal Studies think-tank said would have raised ยฃ9.2bn by the end of this parliament. She said at the time that โextending the threshold freeze would hurt working peopleโ.
Speaking on Monday, Reeves gave a wide-ranging pledge on tax changes.ย โWeโve been really clear in our manifesto about the taxes that we wonโt increase,โ she said. โAnd weโre not going to increase the taxes that working people pay, their income tax, their national insurance and their VAT.โ
Other ministers have given conflicting definitions of the people Reeves will seek to protect.ย
Heidi Alexander, transport secretary, told Sky News on Sunday that โwe made a commitment in our manifesto not to be putting up taxes on people on modest incomes, working peopleโ.
Her reference to people on โmodest incomesโ started a debate about whether she was heralding a tax onslaught on the middle classes.
Jones told ITV that the notion of a modest income โmeans different things to different peopleโ. The key pledge was Labourโs manifesto commitment to โprotect working peopleโs income through their payslipsโ, he said.
In her Budget last October, Reeves increased employersโ national insurance contributions by ยฃ25bn, insisting this did not breach the manifesto commitment โ even if the Treasury admitted that working people would end up paying through lower wage rises.
Meanwhile other ministers have declined to close down talk of a โwealth taxโ, although experts believe Reeves is more likely to increase rates of existing taxes rather than come up with an entirely new levy.
Shadow chancellor Sir Mel Stride said: โWorking people deserve honesty, not a linguistic hokey-cokey every time Labour is asked a straight question.โ
