Tax rises now 'inevitable', claims Labour-aligned thinktank ahead of crunch Budget

The Chancellor has faced backlash over suggestions she could be set to break a key Labour manifesto pledge by hiking income tax.

The Resolution Foundation however suggested there was a way for Ms Reeves implement tax rises which "boosts confidence in the economy and the public finances, while also reducing child poverty and the cost of living."

In its pre-Budget review, the think-tank suggested Ms Reeves should aim to double her fiscal headroom in the November 26 statement to the Commons.

This would result in the buffer against unexpected changes in the economic headwinds being increased to £20 billion, but it acknowledged an increase of £15 billion was "perhaps" more realistic.

Read more: Reeves plots Budget council tax raid in bid to fill black hole in Britain's finances

Read more: Labour refuses to allow 'rebel' MPs back into the party because they 'haven’t been punished enough'

The report states: "This would send a clear message to markets that she is serious about fixing the public finances, which in turn should reduce medium-term borrowing costs and make future fiscal events less fraught."

The think-tank is considered very influential upon Government thinking, with Treasury Minister Torsten Bell as its previously serving as its Chief Executive.

Ministers should also consider new targeted policy measures to help with the cost-of-living crisis, the report suggested, which could include reducing energy bills by placing green levies into general taxation.

This would reduce the average electric bill by £160, the foundation claimed, but be coupled with long-discussed proposals to scrap the two-child benefit cap and the need to find extra headroom “would leave the Chancellor needing to raise taxes by £20-£25 billion."

Hiking income tax would be the "best option" for raising cash, the Resolution Foundation said, but suggested it should be offset by a 2p cut to employee national insurance, which would "raise £6 billion overall while protecting most workers from this tax rise."

Other tax raising measures could include freezing personal thresholds which could raise £7.5 billion if done for two years, according to the think tank, alongside "pro-growth" reforms to the tax system targeting wealth, motoring and property taxes.

"So, although tax rises are inevitable, there is a way to do them which boosts confidence in the economy and the public finances, while also reducing child poverty and the cost of living," the report said.

James Smith, research director at the Resolution Foundation, said: "Budget-watchers are braced for a major downgrade to Britain's productivity outlook.

"But ironically, a major upgrade to the outlook for pay could mean that the Chancellor’s fiscal black hole is less daunting than feared.

"However, reassuring the markets about the state of the public finances, paying for policy U-turns and providing fresh cost of living support won’t come cheap. Tax rises of £26 billion are likely to be needed.

"The Chancellor should look to make sensible tax reforms to car taxes, dividends and capital gains. Switching 2p of employee national insurance onto income tax would raise £6 billion while protecting workers’ wages.

"Together, this will help to deliver a decisive Budget centred around prices, payslips and poverty reduction, and that shifts the focus away from black holes and back onto boosting growth."