The tax threshold freeze looks set to continue as Chancellor Rachel Reeves searches for funds after the government’s welfare U-turn. Experts predict this move could raise billions to plug a growing budget shortfall.
Last week’s surprise reversal on disability benefit cuts left a £3bn annual hole in Treasury plans. Meanwhile, the earlier decision to restore winter fuel payments added another £1.25bn pressure.
Now, economists say extending the tax threshold freeze remains Reeves’ most likely option. The policy, inherited from the Conservatives, currently traps more workers in higher tax brackets each year.
“The tax threshold freeze is politically the simplest move,” said Ruth Curtice of the Resolution Foundation. It avoids breaking Labour’s pledge against income tax rate hikes while still raising £8bn yearly.
However, Paul Johnson of the IFS warned the real budget crisis may come from downgraded growth forecasts. “The OBR could force much bigger changes than this welfare reversal,” he said.
Reeves insists tax rises aren’t inevitable, banking on improved economic data by autumn. “Sentiment is shifting positively,” claimed a Treasury insider, pointing to rising wages and business confidence.
“They’re boxed in extending the freeze is their only realistic path.” Eurasia Group’s Mujtaba Rahman estimates £20bn in adjustments may be needed overall.
Frustration grows over how OBR predictions dominate fiscal planning. Some propose reducing forecasts to once yearly, though officials resist becoming an “international outlier.”
Bank of England Governor Andrew Bailey recently cautioned against overreacting to OBR estimates. Still, with just £10bn fiscal headroom, every decimal point now triggers market speculation. As autumn approaches, all signs point to frozen thresholds and millions more taxpayers feeling the pinch.
For more political updates, visit London Pulse News.
