Rachel Reeves is unlikely to raise the basic rates of income tax and national insurance in order to avoid breaking a promise to protect “working people” in the budget.
It comes as Sky News has obtained an internal definition of “working people” used by the Treasury.
Officials have been tasked with protecting the income of the lower two-thirds of working people, meaning in theory people earning more than around £46,000 could face a squeeze in the budget.
However, this is likely to rule out increases to the basic rate of income tax and national insurance, since they would pay more tax.
Rachel Reeves is unlikely to hike these taxes because the Treasury says those earning £45,000 or less qualify as “working people”.
Sky News understands that ministers are still considering whether to break manifesto pledges, and these options remain on the table.
The main elements of the budget must be finalised by the middle of November, in the next two to three weeks.
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Rachel Reeves is facing a black hole in the budget that could exceed £35bn, after the latest Office for Budget Responsibility (OBR) forecast came in worse than expected.
The OBR had been anticipated to downgrade expected future productivity rates by 0.1% or 0.2% of GDP.
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Each extra 0.1% point means an additional £7bn drop in revenue and a corresponding increase in the size of the black hole the Chancellor must fill in the budget.
However, now the OBR is expected to downgrade future trend growth by 0.3%. This means that the black hole left by the productivity downgrade is around £21bn.
The chancellor needs to find around £10bn because of welfare U-turns, reinstating the winter fuel allowance and other policy changes.
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Read more from Sky News:
Budget 2025: What tax rises and spending cuts could Reeves announce?
On Monday, the chancellor also said she would increase headroom – the buffer between her spending projects and borrowing limited by her fiscal rules.
This is likely to cost another £5bn to £10bn, to get her out of the doom loop “cycle” which Ms Reeves acknowledged to Sky News she risked being stuck in.
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This means the total size of the black hole likely to be needed to be filled is around £35bn or £40bn.
Sources insist that this figure is before the final forecasts from the OBR, and therefore is subject to change.
The Treasury said it does not comment on tax measures or the size of the black hole.
