Rachel Reeves told 'tax rises of £26billion are likely needed' in pre-Budget blow

Their proposals include measures to reduce poverty and lower energy bills, despite anticipated downgrades to Britain's productivity growth forecasts.

Central to their recommendations is a restructuring of personal taxation.

James Smith, research director at the Resolution Foundation, said: "The Chancellor should look to make sensible tax reforms to car taxes, dividends and capital gains. Switching 2p of employee National Insurance onto Income Tax would raise £6billion while protecting workers' wages."

The organisation emphasises the need for the Chancellor to send strong signals to financial markets about fiscal responsibility.

They argue this approach would help reduce future borrowing costs and create more stability for subsequent fiscal events.

The Foundation's analysis reveals that an expected reduction in Britain's trend productivity growth of approximately 0.3 percentage points could significantly impact public finances.

This downgrade would increase borrowing by roughly £14billion in 2029-30, the crucial year for fiscal rule compliance.

Additional pressures include approximately £6billion from higher debt interest costs and £7billion from policy reversals since March.

These factors combined threaten to transform the current £9.9billion of fiscal headroom into a deficit of around £4billion.

However, the think tank notes that improved wage growth projections could potentially offset £13billion of these fiscal challenges.

Despite this partial relief, the Foundation calculates that achieving their recommended £20billion headroom target, plus funding essential cost of living support, would necessitate fiscal consolidation measures totalling £31billion.

Their proposals include eliminating the two-child benefit cap at a cost of £3.5billion and shifting environmental levies away from electricity bills, which would reduce typical household energy costs by £160 annually.

The Foundation's tax reform proposals extend beyond personal taxation adjustments.

They advocate for equalising the tax treatment of partnership income with employer National Insurance contributions, which could generate up to £7billion alongside increases to dividend taxation and closure of Capital Gains Tax loopholes.

Additional revenue-raising measures include lowering the VAT threshold, projected to yield £2billion while potentially stimulating economic growth.

The think tank also recommends reforming Vehicle Excise Duty to generate another £2billion, describing this as essential for modernising the tax system.

The proposals include extending the current freeze on personal tax allowances for an additional two years beyond April 2028.

This measure alone would raise £7.5billion, which the Foundation considers justified given Britain's relatively low tax rates for average earners compared to international standards.

The organisation explicitly advises against increasing VAT, warning it would exacerbate Britain's inflation challenges.

With spending reductions limited following the recent Spending Review, they calculate that a real-terms departmental spending freeze in 2029-30 would save £5billion.

Mr Smith added: "Budget-watchers are braced for a major downgrade to Britain's productivity outlook.

"But ironically, a major upgrade to the outlook for pay could mean that the Chancellor's fiscal black hole is less daunting than feared."

"Tax rises of £26billion are likely to be needed."

He concluded: "Together, this will help to deliver a decisive Budget centred around prices, payslips and poverty reduction, and that shifts the focus away from black holes and back onto boosting growth."