Chancellor Jeremy Hunt is confronting what Treasury insiders describe as the most severe fiscal challenge in decades, with officials actively considering breaking a 50-year political taboo by raising income tax rates or thresholds.
Whitehall sources confirm that the Treasury is examining options to increase either the basic or higher rates of income tax, a move that would mark the first such change since Denis Healey's budget in 1974. This radical departure from half a century of political convention underscores the extraordinary pressure on Britain's public finances.
The Unthinkable Becomes Inevitable
Senior government figures acknowledge that the traditional "tax lock" approach has become unsustainable amid mounting economic pressures. The Institute for Fiscal Studies has repeatedly warned that current spending commitments cannot be met without significant tax increases or spending cuts elsewhere.
One Whitehall insider revealed: "The political calculation has fundamentally shifted. When even income tax adjustments are being seriously debated, you know the situation is dire."
National Insurance: The Preferred Path?
While income tax changes remain politically toxic, Treasury officials are reportedly leaning towards further increases in National Insurance contributions as a more palatable alternative. However, experts warn this approach has limitations and may not generate sufficient revenue to address the fiscal black hole.
The debate comes as Hunt faces competing pressures: delivering on Conservative manifesto promises while responding to urgent calls for increased public spending across multiple departments, particularly the NHS and social care.
A Chancellor Boxed In
Political analysts note that Hunt's room for manoeuvre is severely constrained. With the next election looming and the government trailing in polls, any significant tax increase risks alienating core Conservative voters. Yet failing to address the fiscal gap could undermine economic stability and market confidence.
The Chancellor's team is understood to be exploring every available option, but insiders concede that all choices involve significant political and economic trade-offs. The final decision may come down to which option causes the least damage rather than which delivers positive benefits.
As one former Treasury official commented: "This isn't about good choices versus bad choices anymore. It's about which painful option causes the least long-term damage to both the economy and the government's political fortunes."
