Enjoy summer while you can – Rachel Reeves is already planning an autumn income tax rise

Not for the first time, nor the last, the cry goes up: who would be Rachel Reeves? Most inside the Westminster bubble are able to enjoy a summer break. But the chancellor and her Treasury colleagues face weeks of agonising as to what lies ahead. Come autumn, she must attend the Labour conference, make her set-piece speech and do rounds of interviews. There is the IMF gathering at which the world’s other financiers opine and mark her homework to date. Then there is the Budget.

What Reeves must confront is the knowledge that “faster and further” economic growth is not yielding immediate dividends, if indeed it is happening at all; she will insist it is, but the figures say different. Meanwhile, the fiscal black hole she pointed to as not her fault is actually getting bigger and she can no longer seriously maintain this is entirely due to the Tories. Not after more than a year in office.

A £25bn deficit could rise to near £50bn if the National Institute of Economic and Social Research is to be believed. Significantly, few apart from those in her own team have questioned this figure. Why? Because borrowing has climbed higher than expected and the promised kickstart has not materialised.

Britain’s economy is sluggish, inflation has not gone away and unemployment is a worry, and the fears are real even in sectors once relatively immune – in retail and hospitality, but also in graduate posts. When parents rise up because their sons and daughters cannot secure jobs, Reeves’s headache will get a whole lot worse. A lethal combination of global economic uncertainty, investment decisions on hold, and the looming presence of AI, is having a severely detrimental effect.

She has to plug the black hole, but how? In theory, there are three tools she can use, in any combination, but somehow Reeves must reach that £50bn number. In practice, one avenue is already closed; she cannot borrow any more. Neither, as she is Labour, can she slash public services; austerity was what a Tory predecessor did, it is not for her.

So, there’s only one remaining and that is to raise taxes. Reeves can increase a bit here and chip away there. That’s all it will be: tinkering. It won’t fill the divide. They all add up, but levies on the ill-health and wellbeing products of tobacco and alcohol (and get ready for the howls from beleaguered pub landlords) and gambling will not make anything like enough difference.

She will steer clear of clobbering business; one hit was sufficient (National Insurance Contributions) and she cannot return for more, it would blow apart her growth agenda and send a terrible signal to potential international investors. A wealth tax, advocated by the left, may well be ruled out for the same reason. As will a windfall tax on banking profits that would antagonise a City that Labour went to great lengths to woo.

No, it’s down to VAT, employees’ national insurance, and income tax. Labour has said it will never raise taxes on “working people” but that is what these are. Reeves herself has said she won’t but, realistically, does she have a choice?

VAT is regressive; the rate does not increase the wealthier you are. That leaves employees’ national insurance and income tax. National insurance is capped so in that sense it is also regressive. The fairest option and the most attractive in terms of how much it will raise, is income tax.

It is simply understood, easily collected and applies right across the wealth spectrum; there are few ifs and buts with income tax. It is harder to avoid. But if ever there was a tax on working people, it is this one – billed as such on every payslip.

In a strange way, that might make it more appealing. Any other duty is divisive, a section of society can claim with justification they have been singled out, they will be worse off than others. Income tax is definably progressive.

But it is also the most direct, the biggest, state charge on a workers’ earnings. Making it bigger leaves Reeves and the government open to charges of rank betrayal, of going back on a pledge often and loudly made. It’s Labour punishing the workers, the working-class, its bedrock support. Light the touch paper and run.

What is likely, therefore, is the almightiest of political spin operations as this unpalatable step – the one they said they would never take, that is guaranteed to inflame their supporters, that will inspire their opponents – is explained. It may be billed as a one-off, aimed at saving public services, not to be repeated, the solution to a national emergency.

We will start to know for sure when the holiday season ends, the machine gears up again and the softening up begins for what is coming. Some may be lying on the beach on their towels; if Reeves is at home, with her head inside a towel, no one should be surprised.