Chancellor Rachel Reeves has abandoned plans to raise income tax in the upcoming budget, marking a significant U-turn after weeks of preparing the ground for breaking Labour's manifesto pledge. The decision, made jointly with Prime Minister Keir Starmer on Wednesday, followed a political backlash over a botched attempt by aides to shore up Starmer's leadership.
Government insiders said the change of course was prompted by revised official forecasts showing the fiscal shortfall was closer to £20bn than the previously estimated £30bn. However, some officials suggested the forecasts had not changed drastically and that the last-minute shift was motivated by a desire to avoid exacerbating political turmoil. 'There are good economic reasons not to raise income tax, but politics played a part – it always does,' one official said.
For weeks, Reeves had signalled that tough decisions were needed, telling the BBC that keeping manifesto promises would require spending cuts. In a pre-budget speech on 4 November, she argued against 'sweeping challenges under the carpet'. But internal debate had long divided advisers, with one camp advocating income tax rises to increase fiscal headroom and another favouring a 'smorgasbord' of smaller tax increases to avoid breaking key pledges.
Among the options considered was a 2p rise in income tax offset by a 2p cut in national insurance, which would have raised £6bn while allowing Reeves to claim she was not taxing working people. Other proposals included limiting national insurance cuts to those earning below £50,000, or freezing tax thresholds for longer to raise an estimated £7.5bn. Some planned tax rises, such as removing breaks for professionals in partnerships, were scrapped after the Office for Budget Responsibility judged they would not raise significant revenue.
The chancellor confirmed to the OBR on 31 October that an income tax rise was among 'major measures' under serious consideration. But after the OBR presented its latest forecasts on Monday, Reeves continued to hint at such a rise, telling the BBC that sticking with manifesto commitments would require 'deep cuts in capital spending'. The final decision to rule out major tax rises marks a dramatic reversal, with the budget now expected to rely on a broader range of measures to address the fiscal gap.
