The £40bn question of how Reeves balances the books

Rachel Reeves is being warned that she may have to break Labour’s manifesto pledge not to raise income tax or national insurance in order to fill a £40bn black hole in her spending plans.

- DAVID MADDOX

The concerns come after the chancellor warned her cabinet colleagues this week that she needs to find spending cuts and tax rises of £40bn to balance the books – far more than the £22bn she has claimed the Tories left behind.

Ms Reeves was boosted yesterday by a drop in inflation to 1.7 per cent – the first time in three years it has been under 2 per cent – which means benefit payments will not need to be raised by as much as feared. However, it also means she will not raise as much money as hoped from freezing income tax band thresholds.

The conundrum has led to speculation that Ms Reeves will unveil a £25bn tax raid in her Budget on 30 October, while spending on benefits and even international aid, traditionally protected by Labour, are under threat.

Already she has controversially taken away winter fuel payments from 10 million pensioners amid a plethora of cuts to balance the books after taking over from the Tories at a time when she has also been trying to meet the wage demands of the public sector.

But in a stark warning, Institute for Fiscal Studies (IFS) director Paul Johnson said she will struggle not to break Labour’s commitment to leave income tax and national insurance at their current rates.

He warned that “in the end [Labour] will have no choice but to raise income taxes”.