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Chancellor Rachel Reeves is set to prepare the foundation for an economic plan that may include tax increases, potentially breaking Labour's election promise on income tax.

During what's being called a “forthright” address about the difficult choices facing the government, the chancellor will address the difficult fiscal choices facing the government.

Financial Markets

Her address is set to occur as Tuesday morning, timed with the start of market trading.

Reeves is expected to promise to make fair choices in the upcoming budget but will notably avoid repeating her election promise of no rises in income tax, value-added tax or national insurance.

Starmer's Position

The Prime Minister told MPs on Monday evening that the economic plan would be “a government budget” built on party principles” and pledged it would protect the NHS, lower borrowing and ease the living expenses.

The PM pointed to the challenging circumstances to the long-term impact of previous government policies, including austerity measures, Brexit arrangements and COVID-19 on Britain's productivity.

Parliamentary Reaction

Addressing sceptical MPs worried about potential manifesto breaches, the Prime Minister admitted there would be “difficult but equitable” decisions.”

He differentiated the government's approach with what he called a return to austerity under other parties' plans.

Parliamentarians consistently pressed the Prime Minister on if the budget would remove the two-child benefit cap, applying what one MP called “coordinated pressure” on the administration.

Economic Context

Government planners are understood to be focused on laying the foundation for major changes before the budget reveal.

They believe that last year's success was because of financial sector readiness for investment rule changes and NI rises.

Although the fiscal landscape remains difficult, some sources suggest the financial outlook is less gloomy than originally forecast.

Budget Considerations

The chancellor is seeking to possibly increase her budget flexibility while securing funding to tackle the child benefit restriction and protect health service investment.

There will be a focus on reducing the living costs, with consideration of reducing sales tax on domestic energy bills and some green levies.

Revenue Measures

A prominent research organization has recommended raising personal taxation by 2p while cutting NI contributions by the same amount.

This approach could raise £6bn primarily through higher taxes on those who don't pay NI, such as retirees and landlords.

The Resolution Foundation also proposes further tax increases, including continuing the pause on income tax thresholds, increasing investment taxes and closing capital gains tax loopholes.

Political Considerations

Inside government, key officials believe the biggest risk is the response of party members to potential pledge violations.

A government official stated: “If we are going down this path we need to be completely transparent about the destination.”

A different official stressed the need to show tangible improvements to people as a result of their taxes going up.

Messaging Approach

The chancellor will promise to address rumors surrounding her economic plan, though officials don't anticipate to make specific policy announcements.

During her address, Reeves will stress making choices necessary to deliver strong foundations for the country in the short term and years to come.

The economic plan will be led by government values of equity and prosperity, focused squarely on safeguarding the NHS, reducing national debt and improving the living standards.