Rachel Reeves abandons Budget earnings tax hike – however tax ‘stays on desk’
Rachel Reeves had been signalling that income tax rises loomed in the upcoming Budget on November 26 but the Chancellor has since dramatically changed her plans
Rachel Reeves has abandoned plans for a manifesto-busting hike to income tax in the Budget.
Treasury insiders said better than expected economic forecasts had reduced the size of the black hole in the public finances, allowing the Chancellor to ditch the move.
Ms Reeves had been signalling that income tax rises loomed on November 26 and hinted as recently as Monday that the alternative was spending cuts.
Ministers had mounted a charm offensive to persuade MPs to back the move, which would have shredded Labour ’s vow to protect working people from increases to VAT, National Insurance and income tax.
But the Office for Budget Responsibility told the Treasury that the hole in the public finances is closer to £20billion than £30-40billion some experts had predicted.
READ MORE: What options Rachel Reeves has after Budget income tax U-turn – and who might be hitREAD MORE: Rachel Reeves Budget income tax U-turn sees £26billion wiped off shares
The slightly rosier forecast is due to strong tax receipts, partly from higher wages – meaning people pay more tax – as well as a downgrade in productivity not being as bad as anticipated.
Speculation overnight sparked a sell-off of government bonds after market jitters about the Chancellor changing her tune.
But a Government source told the Mirror: “It’s right that we levelled with the public on the scale of the challenge. It’s right that we were considering all options.”
The Chancellor never wanted to break the manifesto pledge, the source said, adding: “If we don’t have to do it, then we won’t do it.”
But they warned that there were still difficult decisions to be made, and tax “remains on the table”.
Ms Reeves still faces a massive challenge to balance the books, and is expected to build in some £15billion of wiggle room to protect from future economic shocks.
She is believed to be looking at extending the freeze on income tax thresholds for another two years, which had been due to end in 2028.
The move, which is often branded a stealth tax, means more people are dragged into paying a higher rate of tax as their incomes rise.
Another option floated is cuts to income tax thresholds, while keeping the headline rates the same.
Health Secretary Wes Streeting welcomed the U-turn over plans to break Labour’s manifesto commitment.
He told LBC: “I’m not in favour of breaking manifesto pledges. I think that trust in politics and politicians is low and it’s part of our responsibility to not only rebuild our economy and rebuild our public services, but to rebuild trust in politics itself.”
Insiders insisted the decision was not triggered by the chaotic briefing war in Downing Street this week, which forced Keir Starmer to apologise to Wes Streeting after sources suggested the Health Secretary was plotting a coup.
Baroness Harriet Harman said she didn’t believe the Chancellor is being driven by “party political considerations or issues of division within the party” as she welcomed the news.
The former Labour deputy leader said: “At the end of the day, the important thing is that she’s not only able to sustain public confidence, but able to generate the private and public investment needed to get the economy growing.”
But economists sounded the alarm over flip-flopping on key changes in the wake of U-turns on difficult decisions such as cuts to welfare and the winter fuel allowance.
Helen Miller, director of the Institute for Fiscal Studies (IFS) think tank, said it was not unusual for Chancellors to make last-minute tweaks to their Budgets.
She added: “But the news that Rachel Reeves has backed away from a plan to increase the rates of income tax will lead investors to worry that the Chancellor will instead increase a range of smaller taxes that can be more damaging to economic growth.
“They may also worry that the change of plans signals that this Government is reluctant to do politically difficult things.
“These are the kinds of concerns that can lead investors to demand higher returns when lending to the Government.”
Ruth Curtice, Chief Executive of the Resolution Foundation, warned that excessive kite-flying was causing uncertainty.
She said: “It is normal for economic forecasts and policies to change in the run up to the Budget. It is not normal for so much of that to be laid bare in public.
“The market moves this morning and in recent weeks suggest a serious look should be taken at the approach to market-sensitive forecast information.”
A Treasury spokesperson said: “We do not comment on speculation around changes to tax outside of fiscal events.
“The Chancellor will deliver a Budget that takes the fair choices to build strong foundations to secure Britain’s future.”
