Reeves urged to break election pledge and raise major tax as economy slows

Rachel Reeves has been urged by a think tank to cut national insurance and increase income tax to create a "level playing field" and protect workers' pay.

The Resolution Foundation said the chancellor should send a "decisive signal" that she will make "tough decisions" on tax. Ms Reeves is expected to outline significant tax rises in the upcoming budget in November.

The Resolution Foundation has suggested these changes should include a 2p cut to national insurance as well as a 2p rise in income tax, which Adam Corlett, its principal economist, said "should form part of wider efforts to level the playing field on tax". The think tank, which used to be headed by Torsten Bell, a Labour MP who is now a key aide to Ms Reeves and a pensions minister, said the move would help to address "unfairness" in the tax system.

It released its report as a closely-watched survey of business activity suggested a loss of momentum and confidence ahead of possible new tax increases in the budget. S&P Global's preliminary UK Composite Purchasing Managers' Index, covering the services and manufacturing sectors, also showed a further rise in job losses.

The prospects ahead also look gloomy as recent official data has pointed to a slowdown for growth. A report by the Organisation of Economic Co-operation and Development (OECD) has warned that higher taxes and spending cuts are set to weigh on UK output next year.

The issue of tax is dominating the build up to the chancellor's speech as she stares down a deepening black hole in the public finances. As more people pay income tax than national insurance, including pensioners and landlords, the foundation estimates the switch it is suggesting would go some way in raising the £20bn in tax it thinks would be needed by 2029/2030 to offset increased borrowing costs, flat growth and new spending commitments.

Other estimates go as high as £51bn. 'Significant tax rises needed' Another proposal by the think tank would see a gradual lowering of the threshold at which businesses pay VAT from £90,000 to £30,000, as this would help "promote fair competition" and raise £2bn by the end of the decade.

The Resolution Foundation also recommends increasing the tax on dividends, addressing a "worrying" growth in unpaid corporation tax from small businesses, applying a carbon charge to long-haul flights and shipping, and expanding taxation of sugar and salt. "Policy U-turns, higher borrowing costs and lower productivity growth mean that the chancellor will need to act to avoid borrowing costs rising even further this autumn," Mr Corlett said.

"Significant tax rises will be needed for the chancellor to send a clear signal that the UK's public finances are under control." He added that while any tax rises are "likely to be painful.