The government’s Budget promises

In summary

• Rachel Reeves’s choices at the Budget are constrained not just by her fiscal rules, but also by Labour’s 2024 manifesto promises 
• These include not raising taxes “on working people” and specifically rule out increases in income tax, employees’ NI and VAT 
• Combined with a commitment not to touch the pensions triple lock, they significantly constrain the Chancellor’s room for manoeuvre – at least in theory 

No one can accuse Rachel Reeves of making things easy on herself. The Labour government came to power in July 2024 facing a difficult inheritance: The economic impact of the pandemic, the Ukraine crisis and soaring inflation had left the public finances precarious.  

To add to this, though, the incoming government imposed its own constraints. First, it committed to abide by “cast iron” fiscal rules:  

• The stability rule that it would balance the current budget, so that day-to-day costs were met by revenues. 
• The investment rule to ensure that net financial debt fell as a proportion of GDP, keeping debt “on a sustainable path”  

In addition to this, the party also made election promises not to increase taxes on working people. The Chancellor was able to raise £40 billion extra in taxes in Labour’s first Budget in October 2024 despite this pledge. According to the latest analysis from the National Institute of Economic and Social Research (NIESR), she must now raise even more to meet the stability rule. 

In the Autumn Budget 2025, however, the constraints could significantly limit her options. 

The promise not to raise taxes on workers in the Labour Party’s manifesto explicitly rules out a range of tax rises.   

“Labour will not increase taxes on working people, which is why we will not increase national insurance, the basic, higher, or additional rates of income tax, or VAT,” the manifesto reads. 

This is a significant restriction. Income tax alone represents more than a quarter of all government receipts, an estimated 27% in the 2025-26 fiscal year, according to the Office for Budget Responsibility; VAT almost 15%. National insurance contributes another 16%, with more than a third of this estimated to come from employees’ contributions, according to the Institute for Fiscal Studies. Consequently, the pledge not to raise taxes on workers applies to close to half of the government’s current tax revenue. 

Moreover, while the manifesto did not prevent the increase in employers’ national insurance contributions, its pledges extend beyond personal tax. It also commits the government to not raising corporation tax, for example. 

“Labour will cap corporation tax at the current level of 25 per cent, the lowest in the G7, for the entire parliament, and we will act if tax changes in other countries pose a risk to UK competitiveness,” the manifesto states. The OBR forecasts that onshore corporation tax receipts will raise £971bn in 2025/26 – another 8% of revenues. 

Combined with its commitments to maintain spending, such as retaining the triple lock on the state pension, these promises significantly limit the choices available to the Chancellor as she attempts to balance the Budget.   

There are, of course, plenty of taxes outside the scope of those on “working people”, but some were raised in the last Budget, and are likely to deliver diminishing returns. Provisional figures for capital gains tax receipts, for instance, show a drop of 10% in the last fiscal year – following an 18% drop the year before.  

Many other avenues offer little certainty of quick wins:  

• A wealth tax has strong arguments against it, with even the government’s Business Secretary describing the idea as “daft” 
• A windfall tax on the big banks, similar to that on energy companies’ profits, could raise billions. The heads of Lloyds Bank, Barclays and Natwest have all spoken out against it, though, and it would come when some warn London’s status as a global financial hub is “fragile” 
• Even ideas with industry support, such as eliminating the de minimus exemption on low-value imports, strongly supported by UK retailers, have downsides, with warnings of inflation and the impact on regional airports 

Other options, of course, exist, from limiting private pensions’ tax reliefs and increasing fuel duty to further tightening inheritance tax rules to remove the seven-year exemption on gifts.  

As well as changing taxes, the Chancellor can also decide to keep them the same for longer. Fiscal drag is likely to be a strong contender for raising revenue in the forthcoming Budget, while keeping to at least the letter of the government’s manifesto commitments. 

Freezing thresholds, rather than raising them in line with inflation, helps pull more people into the scope of national insurance and income tax and higher bands. In 2023, the OBR estimated that frozen income and national insurance thresholds from 2021 and 2022 would raise £42.9bn by 2027-28 compared to increasing the thresholds in line with inflation.  

Under the Conservative government, income tax thresholds were frozen in April 2022 until 2028. The Labour government could extend that, and the Prime Minister recently refused to rule it out. However, it would require a U-turn from the Chancellor, who rejected extending the freezes to income tax and NI in her last Budget, saying it would “hurt working people”. 

The final alternative is that Rachel Reeves breaks the manifesto promises, her fiscal rules or both.  

On the former, the International Monetary Fund warned in July that the UK faced “tough fiscal choices”. 

“While the UK has scope to raise revenue, which is lower than in some G7 peers, its revenue ratio is close to a post WWII high. Unless the authorities revisit their commitment not to increase taxes on ‘working people’, further spending prioritisation will be required…” its report noted. Among the examples of spending cuts it suggested in particular was the pensions triple lock.   

Others, such as the IFS, have suggested relaxing its fiscal rules to at least prevent policy changes purely based on changes in the OBR’s forecasts.   

One way or another, the NIESR argues that something has got to give. Its report says the Chancellor faces an “impossible trilemma”, and cannot meet her fiscal rules, spending commitments and the manifesto promises to avoid tax rises for working people.  

It concludes: “At least one of these will need to be dropped.” 

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