Rachel Reeves should introduce a ‘Trump tax’ in her next Budget

When the chancellor inevitably hikes taxes, her allies should give the media a nod that it is a result of the US president’s tariffs, writes Andrew Grice. It would ring true with the public and pin the blame where it's due

Tax rises in the next Budget in October were seen as highly likely, even before Donald Trump announced his blizzard of tariffs. Now another tax hike is inevitable.

Keir Starmer and Rachel Reeves could have used last week's spring statement to signal that tax would have to rise to meet the UK's increased defence spending. Their decision to muddle through was a missed opportunity; they will have to bite the bullet this autumn.

Even if, as I expect, Starmer persuades Trump to remove most of his tariffs on the UK in weeks, as part of a US-UK trade deal, the UK will be hit by the chilling effect on the global economy. The low growth forecast for the UK in the next few years now looks optimistic; it could easily become no growth or recession.

Reeves should tweak her fiscal rules in October – for example, by excluding defence spending – but she probably won’t, for fear of spooking the financial markets.

The chancellor’s first instinct will be to impose further public spending cuts. But she will have just concluded a government-wide spending review in June, with departmental budgets set for three years ahead, and would face a cabinet mutiny if she tried to reopen ministers’ (mostly) ungenerous settlements. There would be zero appetite for more cuts among Labour MPs after a bruising battle over the £5bn reduction in sickness and disability benefits.

Theres's a growing recognition among ministers that taxes will rise. "We need a reset moment," one told me. Better to start work now and get on the front foot than be accused of last-minute emergency measures.

Starmer is understandably reluctant to break Labour's manifesto pledge not to raise income tax, national insurance and VAT. He views tax as “a cost of living issue,” allies say. True, living standards will be further squeezed by this week’s rises in council tax and energy, water, phone and broadband bills.

But there's a case for increasing income tax for the highest earners, which Labour could argue would not hit ordinary "working people". Although the tax burden is heading for its highest on record, the average worker is taxed at 19 per cent – barely higher than in 1990, and less than America’s 24 per cent and Australia’s 23 per cent.

While the public seem to prefer spending cuts to tax increases that would hit them personally, there is support for raising the 45 per cent top rate of income tax paid on earnings above £125,140, according to More in Common.

There are plenty of ways to increase taxes without breaching the manifesto. Tinkering by extending the freeze on tax allowance and thresholds for another two years (to raise up to £8bn) will surely happen. But Reeves will need to go much further to put public services on a stable footing. With her slim £9.9bn of headroom against her fiscal rules bound to be wiped out for a second time, she should create a £30bn cushion for such turbulent times (in line with the average headroom figure since 2010).

Reeves should reject growing calls from Labour MPs and party members for a wealth tax on billionaires, which would probably be unworkable. But she has several options under a banner of "fair tax” reforms.

In 2016, she supported a shake-up of tax relief on pensions. Almost two-thirds of the £42bn cost goes to people on the 40 and 45 per cent income tax rates. It should be at the same rate for everyone. Similarly, capital gains tax could eventually be equalised with income tax, though the chancellor will be wary of moving quickly after raising it in last October's Budget.

She should announce a shake-up of council tax to make it fairer for people living in poorer areas and raise money for cash-strapped local authorities which, in areas such as social care, would reduce pressure on centrally funded services. The current system, based on 1991 property values, is indefensible. Stamp duty reform could be part of this mix. A 1 per cent annual levy on the value of the 700,000 homes left empty for years could bring in £2bn a year.

The chancellor could revive plans she drew up in opposition to close tax loopholes. As The Independent has argued, she should replace her crackdown on non-doms with a more effective Robin Hood tax. Some of the money raised should be spent on tackling child poverty, to prevent the benefit changes pushing another 50,000 children into poverty. Removing the two-child limit would remind the public and Starmer's party that he has not abandoned Labour's values.

Reeves should label the tax reforms as necessary to cope in the new world economic order ushered in by Trump. Her allies should give the media a nod that it is a "Trump tax" – even if ministers don't call it that. It would ring true with the public and pin the blame where it's due.

Crucially, the extra revenue would allow Labour to deliver the change it promised last year, notably on public services, without which it will not secure a second term.