Britain's high-stakes budget could benefit from the implementation of 'sin taxes'.

• On Wednesday, U.K. Finance Minister Rachel Reeves will present the government's budget, ending months of speculation about the impact of Labour's measures on "working people" and the extent to which the government plans to borrow to support investment.
• The sixth-largest economy in the world must "face the stark truth of financial responsibility" and make "difficult choices," as advised by Prime Minister Keir Starmer.
• Reeves is reportedly considering a sin tax raid as part of a series of measures aimed at generating billions of pounds.

The Labour government in Britain is likely to increase "sin taxes" in the upcoming October budget, with the aim of generating additional revenue for the Treasury through profitable industries.

The U.K. Finance Minister, Rachel Reeves, will present the government's budget on Wednesday afternoon, concluding the months of speculation regarding the impact of Labour's measures on "working people" and the extent to which the government plans to borrow for long-term investment.

Keir Starmer, the Prime Minister, has advised the world's sixth-largest economy to "accept the unavoidable truth of financial constraints" and make "difficult choices" to prevent a negative trend.

Reeves is reportedly considering a sin tax raid as part of a series of measures, including a significant alteration to the government's fiscal guidelines.

The taxes frequently increased in government budgets are commonly known as levies, and they mainly target harmful goods like alcohol, cigarettes, and the gambling industry.

While sin taxes are expected to generate billions of pounds in revenue for the budget, they will not be sufficient to address the "black hole" in the country's public finances.

Michael Field, Europe market strategist at Morningstar, advised starting with sin stocks, which have been taxed heavily but still offer the chance to be rinsed further, according to a video call with CNBC.

"The government may consider them as easy targets since no one is defending them, but it's crucial to be cautious not to harm the goose that lays the golden eggs. Additionally, the consequences of an unprofitable industry operating in a lawful manner could lead to a black market."

What's on the table?

The gambling sector may be targeted by Labour in one of their sin industries. According to The Guardian on Oct. 11, sources close to the discussions revealed that the Treasury is considering new taxes that could generate between £900 million ($1.17 billion) and £3 billion.

The stock prices of gambling companies listed in London dropped significantly after the news. Entain, which owns popular brands like Ladbrokes and Coral, experienced a 8% decline on October 14th. Meanwhile, Evoke, the owner of William Hill, saw a 14% drop in stock value.

The U.S.-listed company, which owns Betfair and Paddy Power and has a primary listing in London, experienced a decline following the release of the report.

The Labour government is reportedly considering raising the tax on vaping products and increasing tobacco duty.

The British government plans to prohibit the sale of disposable vapes in England starting next summer, as the use of these products has increased by over 400% between 2012 and 2023, with 9.1% of the population currently utilizing them.

When contacted by CNBC about the possibility of sin taxes in the budget, a Treasury spokesperson was not immediately available to provide a comment.

In the upcoming budget, sin industries are predicted to be the target, with broad public support and substantial tax revenue likely to result from such a move, according to Bruce Morley, an economics and finance lecturer at the U.K.'s University of Bath.

Morley stated that the gambling sector "may be a potential target," while increasing taxes on tobacco products, including vaping, would benefit both tax revenues and public health.

Morley stated in an email to CNBC that vaping currently receives a standard 20% VAT rate, unlike tobacco, which has an individual levy. However, this could change in the budget, particularly due to health concerns about the effects of vaping on young people.

"Although the revenue generated from taxing vices will not be sufficient to meet the government's goals, it means that other unpopular taxes will have to increase significantly," he stated.

What could it mean for stocks?

What would be the impact of increasing taxes on gambling and tobacco sectors on stocks, according to Morningstar's Field, has already been partially priced in due to the intense speculation surrounding Wednesday's budget.

Imperial Brands and other tobacco giants, according to Field, have seen their stock prices "beaten up" relative to their perceived worth, but the market remains uncertain about the regulatory environment surrounding vapes.

It is uncertain what the government will do in a short period of time, but it is likely that they will increase the price of tobacco and possibly alcohol, as well as impose taxes on betting through a backdoor method.

"Probably not a silver bullet, it's just one part of a whole solution to fix the budget deficit," he said.