The head of the Confederation of British Industry (CBI) Rain Newton-Smith said the Government must “change course” and avoid heaping more costs on firms.
The Chancellor will hike taxes to fill a black hole in the public finances as she faces the prospect of a downgrade in the Budget watchdog’s economic growth forecast for every year of this Parliament.
At the CBI’s conference in Westminster, Ms Newton-Smith urged Ms Reeves to stand up to Labour’s backbenchers to take tough decisions on issues such as cutting welfare spending.
She said Ms Reeves had to prove she was committed to economic growth and make the hard choices to deliver it.
“Prove it – against opposition, against short-term politics, be it on welfare, be it pension increases, show the markets you mean business,” she said
“Short-term politics leads to a long-term decline, and this country cannot afford another decade of stagnation.
“That means making hard choices for growth now before they get harder, having the courage to take two tough decisions rather than 20 easier ones.
“Raising the headroom to make promises stick, it means one or two broad tax rises, rather than death by a thousand taxes.”
The scale of the task facing the Chancellor was underlined by a Sky News report that the Office for Budget Responsibility has downgraded its forecast for 2026 and every other year before the next election due in 2029.
Ms Reeves has already acknowledged publicly that growth forecasts will be hit due to the OBR’s revision of its assumptions about productivity.
The downgrade, and the subsequent reduction in tax revenues, will force Ms Reeves to hike taxes to balance the books and build a bigger buffer against future shocks than the historically-low level of headroom she has previously given herself.
In her search for extra taxes, she could hit more than 100,000 high-value properties with a levy that applies to those worth more than £2 million and could raise £400-£450 million.
Some 2.4 million properties in the top three council tax bands would be revalued to determine which would be subject to the surcharge.
People will be able to defer the cost until they die or move house to avoid forcing them to sell up, according to the Times.
She is also widely expected to extend the freeze on income tax thresholds, potentially dragging around 1.75 million people into paying more to the Exchequer.
The Institute for Fiscal Studies think tank estimates that a two-year extension to the current freeze in the thresholds would mean 960,000 more people paying income tax and 790,000 more people dragged into the higher rate as their wages increase.
As Ms Newton-Smith called for tough decisions on welfare, the Chancellor appeared set to lift the two-child benefit cap, a move aimed at easing child poverty and one popular with Labour MPs and activists, but which could cost more than £3 billion.
But Ms Reeves will extend a crackdown on benefit fraud in a bid to save £1.2 billion by March 2031.
What could be in the Budget on Wednesday?
Income tax: After a press conference and behind-the-scenes briefings aimed at preparing the country for a manifesto-busting increase in income tax, Ms Reeves then abandoned the idea of becoming the first Chancellor in half a century to take that step.
The measure was dropped from the “hokey cokey budget”, as Speaker Sir Lindsay Hoyle described it, after the Treasury apparently received forecasts from the budget watchdog which were not quite as grim as first feared.
Instead, she may now opt for extending the existing freeze on the income tax thresholds which, if she also kept national insurance thresholds at their current rate, would raise around £8.3 billion a year for the Exchequer in 2029/30.
By not increasing the thresholds she will benefit from a process called “fiscal drag”, where as wages go up people are dragged into paying tax for the first time or shifted into a higher rate.
Rail fares: They will be frozen in the Budget, saving commuters on pricier routes more than £300 a year. It is one of a series of measures aimed at easing the cost of living despite the increased tax burden many people and businesses are likely to face.
Prescriptions: The cost of an NHS prescription in England will be frozen at £9.90.
Tax for electric vehicles: The Chancellor is thought to be considering a 3p per mile tax for EVs as she seeks to protect revenues as people shift away from petrol and diesel – and the fuel duty that brings in to the Exchequer.
EV buyer subsidy: She will add £1.3 billion to a grant that knocks up to £3,750 off the price of an electric vehicle as part of a package that will also see £200 million go towards the rollout of charging points.
Tax hike on high-value homes: A new levy could be applied to some of the most valuable homes in what has been billed by some as a “mansion tax”.
The move would reportedly revalue some of the most valuable properties across council tax bands F, G and H and hit 100,000 of them with a new surcharge, with the threshold starting at £2 million.
Salary sacrifice: The Chancellor might introduce limits on how much employees can stash in their pensions under salary sacrifice schemes before it becomes subject to national insurance.
Reports suggest she could cap this at £2,000 a year, which would reduce how much people put away in their pension pots and put a dent in take-home pay for those who use the scheme to stay in a lower tax band.
Two-child benefit cap: As pressure has piled up, Ms Reeves is expected to scrap the limit that restricts child tax credit and universal credit to the first two children in most households.
Estimates vary on how much this would cost, with the Resolution Foundation estimating around £3.5 billion by the end of this Parliament (2029/30), while the Child Poverty Action Group and Joseph Rowntree Foundation have lower calculations of around £3 billion by then.
Crackdown on benefits fraud: Ms Reeves will seek to raise £1.2 billion by March 2031 by extending a crackdown on fraudulent and mistaken universal credit payments via the targeted case review (TCR) scheme.