The UK government, led by Chancellor Rachel Reeves, is actively preparing for the upcoming budget scheduled for November 26, with discussions focusing on addressing a significant budget deficit of over £30 billion.

Reeves is considering breaking Labour's manifesto pledge of no income tax increases, amid a £71.8 billion deficit for April to September and economic challenges such as lower growth and welfare reversals.

To bridge the fiscal gap, Reeves is debating various tax measures, including raising the main income tax rate by 1p to generate around £8 billion, which would be the first such increase since the 1970s.

The Treasury is weighing the balance between economic needs and political risks, with some advisers emphasizing the importance of building a larger fiscal buffer to avoid future tax hikes and possibly enable tax cuts.

Additional revenue options include higher taxes on professionals like lawyers and GPs, a mansion tax on expensive homes, and new charges on LLPs, but these are seen as insufficient alone to cover the deficit.

There is internal debate about increasing the fiscal headroom beyond the current £10 billion, with some suggesting a larger buffer to prevent recurrent tax hikes and to maintain economic stability.

The government attributes the deficit to external factors such as tariffs, conflicts in Ukraine and Gaza, and Brexit, which have impacted public finances more than initially expected.

Reeves is also seeking a larger fiscal buffer than the previously planned £9.9 billion, as economic forecasts and rising borrowing costs have reduced available reserves.

Options under consideration include raising taxes on high earners, increasing the top income tax rate, and adjusting thresholds, although no final decision has been made.

Reeves faces political and economic pressures, with some advising that small tax hikes may not be enough to cover the deficit and could harm economic growth, prompting discussions about targeted increases for the wealthy.

The decision to raise taxes is also influenced by upcoming local elections and the need to maintain electoral support amid strong competition from Nigel Farage's party.

Reeves is aware that breaking manifesto promises could lead to political criticism but believes a one-time income tax increase might help restore public trust and stabilize public finances.