The Chancellor is weighing up tough choices over whether to slash spending on public services or raise billions of pounds through tax rises in the Budget on 28 October.
The Institute for Fiscal Studies (IFS) has warned John Healey may have to raise taxes by up to £35bn to cover looming spending pressures related to increasing defence spending and higher inflation triggered by the Iran war.
It comes amid warnings that the Chancellor’s fiscal headroom could fall from the forecast £23.6bn to roughly £14bn following a surge in the cost of government borrowing, triggered by conflict in the Middle East.
If the Government chooses to top up departmental spending without increasing borrowing, it would require huge tax rises by the end of the decade.
However, Andy Burnham has promised to stick within the constraints of Labour’s 2024 election manifesto, which ruled out raising core taxes on working people, including income tax, VAT or employee national insurance.
Here are some of the other options for the Prime Minister and Chancellor, and how likely they are.
Windfall tax on banks
Speculation has intensified that Healey could hit the nation’s biggest banks with a tax rise in his first Budget, after he held talks with finance bosses last week.
The Chancellor reportedly told the chief executives of banks and building societies including Barclays, HSBC, Lloyds, Nationwide and NatWest that the UK is in a tough financial position, but he has not yet decided whether to increase taxes on the industry.
Some Labour backbenchers have been pushing for a windfall tax on banking profits to sit alongside existing taxes on the sector.
Bank executives warned the Chancellor that such a levy could affect lending and make the UK less attractive to investors. They argue this would have wider economic consequences.
However the Trades Union Congress – which represents unions across England and Wales – found that tax cuts for big banks have deprived the government of £6bn in revenue over the last three years.
Hitting banks with a windfall tax has the backing of voters, according to the latest BMG Research survey for The i Paper, which found that half the public support such a move, compared to 13 per cent who are against it.
Likelihood: 3/5
Extending the mansion tax
Healey has ruled out lowering the threshold for the high value council tax surcharge (HVCTS) – or “mansion tax” – from £2m to £1.5m following warnings it could disproportionately hit middle earners in London.
He had been considering widening the surcharge to include less expensive homes to raise extra money for the Treasury.
In last year’s Budget, then chancellor Rachel Reeves announced that owners of properties in England valued at more than £2m would have to pay a levy of at least £2,500 from 2028.
Lowering the threshold would increase the number of homes expected to pay it from 134,000 to 271,000, based on current values, with around half of the affected properties in London.
The move was criticised by many Labour backbenchers, with one London MP telling this newspaper it would be a “catastrophic electoral own goal”, while even some left-wingers representing seats elsewhere in the country warned it could hit “ordinary families” living in the capital.
Another Labour MP said they were pleased changes to property tax were “on the agenda” and suggested there could still be reform in this area.
Likelihood: 1/5
Capital gains tax reform
Many economists and Labour insiders saw an increase to the capital gains tax (CGT) as the front-runner after Healey told The Sunday Times that the UK has the “lowest capital gains tax (CGT) of any European G7 nation”.
CGT – paid on the profit of the sale of an asset such as a second home or shares – currently sits at 18 per cent for basic-rate income taxpayers and 24 per cent for higher and additional-rate taxpayers. This year, individuals can make £3,000 profit on capital gains before it is taxed.
Labour insiders are pushing for CGT rates to align more closely with income tax rates to remove a loophole for those who earn money on properties and shares, compared with those who pay tax on normal earnings.
CGT reform has previously been backed by Burnham’s second-in-command, First Secretary of State Louise Haigh, and the Defence Secretary, Wes Streeting – although this was before their roles in Burnham’s Cabinet were confirmed.
However, leading economists have warned that increasing CGT could damage investor confidence in the UK, potentially harming economic growth.
The amount it would raise is fiercely contested, with the Institute for Public Policy Research claiming it could generate £14bn a year, but sceptics suggesting it could actually end up costing the Treasury money if people delayed asset sales or moved overseas.
Likelihood: 3/5
Pensioner tax rises
Pensioners and those saving towards their retirement could face some tax increases.
One option would be to cut the size of the tax-free lump sum people can take from their pensions, which is either 25 per cent of the amount or £268,275 – whichever is lower.
Another idea is to limit pension tax relief. If you pay into a pension, you receive relief at whatever income tax rate you pay, so higher-rate payers get more generous tax relief.
Former pensions minister Sir Steve Webb has called on the Government to raise income tax for the over-40s to help fund a national care service. However, this would be after the next general election, due in 2029 at the latest.
Policy that directly affects older voters is known to be politically toxic as pensioners are more likely to turn out at the polls.
Likelihood: 2/5
Tax relief for pensioners
However, people who rely on the state pension as their main source of income are set to be protected from being dragged into the income tax threshold.
Because of the triple lock, the state pension is set to climb to more than £13,000 a year in April, putting it above the income tax personal allowance of £12,570 for the first time.
In his speech to Labour’s annual conference last month, Burnham confirmed his “commitment to ensure low-income pensioners won’t be dragged into paying income tax in this Parliament”.
The Treasury is expected to outline details of how this will work in the Budget.
Likelihood: 5/5
Inheritance tax
Before becoming PM, Burnham suggested charging inheritance tax as a flat 10 per cent levy on all estates to fund social care.
The PM has since confirmed his mission to reform social care, but said this would only be from the next general election and that it would be funded via moving away from the triple lock on state pensions.
However, there is speculation that smaller tweaks to inheritance tax could be made, such as tightening rules around giving gifts. Currently, you can give away up to £3,000 per year without triggering the levy.
Pressure is growing on inheritance tax reform after opposition leader Kemi Badenoch announced a flagship proposal to abolish the levy entirely as soon as public finances permit.
Likelihood: 2/5