Chancellor Rachel Reeves has performed a dramatic U-turn on plans to raise income tax, abandoning the measure after weeks of public hints that she would break Labour's manifesto pledge. The reversal, reported by the Financial Times, has stunned Labour MPs, ministers, and financial markets, with the cost of government borrowing spiking as 10-year gilts rose 12 basis points to 4.56 per cent.
Treasury sources insisted the decision was driven by better-than-expected economic data, but others blamed interference from Downing Street in a bid to protect Prime Minister Sir Keir Starmer from a potential leadership challenge. One minister told The Independent that No 10 is “gripped by a state of panic”. The U-turn follows a briefing – reportedly by Downing Street officials – that health secretary Wes Streeting was planning a leadership bid.
The chancellor is now expected to raise revenue through a handful of smaller taxes, including a gambling tax, a bank levy, various wealth taxes, or a mansion tax on properties valued at £2m and over. Economists have warned that such a “grab bag” approach could make the tax system more complicated and inefficient, and may not raise enough to build a sufficient buffer against fiscal rules.
Jim O’Neill, former Treasury minister and Goldman Sachs boss who served as Reeves’s economic adviser in opposition, described the developments as “bothersome”. Stephen Millard of the National Institute of Economic and Social Research cautioned that relying on marginal tax changes risks creating distortions and uncertainty. The Institute for Fiscal Studies noted that freezing income tax thresholds – which are not covered by the manifesto pledge – could be another option to raise significant revenue.
Bloomberg reported that the Office for Budget Responsibility has revised its fiscal forecast, reducing the estimated black hole in public finances to £20bn, down from the £30-40bn previously cited. The decision on income tax was communicated to the OBR on Wednesday, according to the FT. A Treasury spokesperson declined to comment on speculation.
