Chancellor Rachel Reeves is confronting what experts describe as a credibility crisis following her dramatic reversal on planned income tax increases in the upcoming Budget. The sudden policy shift has triggered significant market reactions and exposed deep divisions within the Labour government.
Market Turmoil and Political Fallout
The Chancellor's extraordinary U-turn came after weeks of heavy暗示 and tough rhetoric about the necessity of tax increases to stabilise public finances. Markets responded immediately, with UK borrowing costs rising as investors added risk premium to British government debt. The Pound also took a hit following the overnight policy reversal.
The decision appears to have been prompted by an open revolt within Labour ranks against breaking election manifesto commitments. Downing Street sources indicate growing panic about Sir Keir Starmer's political survival, with the Prime Minister's position appearing increasingly vulnerable following a disastrous plunge in polling numbers.
The Fiscal Challenge Remains
Despite abandoning the income tax increase, Ms Reeves still faces the formidable task of closing a fiscal gap of up to £40 billion when she presents her Budget on November 26. Government sources attempted to justify the policy reversal by pointing to slightly improved forecasts from the Office for Budget Responsibility, noting that stronger wage revenues had partially offset a grim productivity downgrade, leaving a £20 billion deterioration.
Economists have expressed alarm that the Chancellor will now resort to what they describe as a smorgasbord of smaller tax increases to bail herself out of trouble. These are expected to include a new gambling levy, higher taxes on expensive properties, and per-mile charges for electric vehicles.
Stealth Tax Thresholds Loom Large
The most significant revenue-raising measure under consideration involves extending the freeze on tax thresholds for another two years. This stealth tax policy could raise billions by dragging millions more people into higher tax brackets. The Institute for Fiscal Studies estimates that extending the threshold freeze until April 2030 would net £8.3 billion that year alone.
Economist Julian Jessop of the IEA think-tank has calculated that significant reductions in tax thresholds would be needed to raise the equivalent of a 1p increase in the basic rate of tax. This could see the higher rate threshold fall from £50,270 to approximately £46,000, and the top rate threshold drop from £125,000 to £100,000.
The Treasury has not categorically denied that threshold reductions are being considered, acknowledging that the Chancellor will still need to use big levers to raise money, with final decisions yet to be taken.
Internal Labour Strife
The policy reversal has exposed significant tensions within the Labour government. Health Secretary Wes Streeting publicly demanded that aides responsible for briefings against cabinet ministers be sacked, accusing Downing Street of self-destructive behaviour. Labour insiders suggest Mr Streeting now believes he could potentially challenge for the leadership.
One government source told the Daily Mail: If life hands you lemons... And he's been given the run of the orchard this week. The internal briefing war has raised serious questions about the stability of Sir Keir's leadership just 16 months after he entered Number 10 with one of the largest election majorities in modern political history.
Expert Warnings and Market Reactions
Financial experts have voiced serious concerns about the government's handling of economic policy. Nigel Green, CEO of global financial advisory deVere Group, warned that mixed signals were spooking markets. This is exactly how credibility shocks begin, he stated. Gilts are sliding, borrowing costs are climbing, and sterling is weakening because markets fear the government is improvising.
Even the Resolution Foundation, a think-tank often favoured by Labour ministers, expressed concern about the public nature of the policy deliberations. Chief executive Ruth Curtice noted that while it's normal for economic forecasts and policies to change before a Budget, it is not normal for so much of that to be laid bare in public.
Crossbench peer Lord Jim O'Neill, a former Goldman Sachs chairman, told BBC Radio 4: I'm a bit surprised and confused... It is pretty hard to escape the conclusion that the change of mindset is being done because of the divisions inside the Labour Party.
As the November 26 Budget date approaches, all eyes remain on how Chancellor Reeves will navigate the competing demands of fiscal responsibility, political survival, and market confidence while attempting to rebuild the government's credibility.
