Former Bank of England Chief Warns Income Tax Hike is Inevitable, Criticizes Reeves’ Promise

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Mervyn King, the former governor of the Bank of England, has criticized Chancellor Rachel Reeves’ pre-election tax promises as “irresponsible” and warned that an increase in income tax will be necessary. King, who led the Bank from 2003 to 2013 and was once Reeves’ boss during her time there, argued that she made “silly” commitments on taxation before the general election and should reconsider them now that she is in government.  

 

During the campaign, Labour pledged not to increase VAT or income tax and refused to reverse a Conservative government decision to cut employee national insurance contributions. Economists at the time warned that this cut was unsustainable. However, in her first Budget, Reeves opted to raise employer national insurance contributions, aiming to generate around £25 billion annually.  

 

“I think it would have been better to have said in the Budget, ‘look, the previous government was irresponsible in cutting employee national insurance contributions, but let’s be frank, we were pretty irresponsible in saying we wouldn’t reverse it,’” King said.  

 

He suggested that undoing former Chancellor Jeremy Hunt’s 2p cut to employee national insurance contributions could allow Reeves to reconsider her increase in employer national insurance rates, which, he noted, has had unexpected consequences, even affecting charities.  

 

“I think it is possible to say to people, ‘maybe we said some silly things before the election, this is the situation Britain now finds itself in, and this is what we have to do in the next four to five years,’” King added. “I think people want politicians to be honest and give them a plan.”  

 

However, he cautioned that reversing the national insurance cut alone would not be sufficient. “In the long run, to raise enough money, I think we will have to raise the basic rate of income tax,” he said. “I see no harm in doing that, provided, and this is a clear condition, it is being used to finance a well thought-through programme of spending.”  

 

King also challenged Reeves’ self-imposed fiscal rules, which prevent borrowing to fund day-to-day government expenses and require that national debt must be falling as a percentage of the economy. He suggested that the chancellor should revise these constraints to allow for increased government spending.  

 

“The fiscal rules ought to be defined in terms of whether we think it is more likely than not that five years from now, the ratio of debt to national income will be able to fall,” King said. “That would enable her to say, if we have to spend more now and we don’t want to depress the economy in the next 12 months, we may have to borrow more in the next year. But in the rest of the parliament, we will find a way in which, through raising taxes and cutting out waste, we will be able to reach that target.”

 

Based on a report by The Independent  2025-03-01