Chancellor Rachel Reeves has been accused of turning Britain into an 'economic laughing stock' following her sudden decision to abandon plans for a manifesto-breaking income tax rise. The dramatic U-turn, executed just weeks after laying the groundwork for the hike, has sparked significant chaos in the City and drawn fierce criticism from political opponents.
The Budget Volte-Face
Rachel Reeves spent weeks preparing for a tax increase for millions of workers scheduled for this month's Budget on November 26. However, on Friday, she performed a shock reversal that sent government borrowing costs soaring and triggered a sell-off in gilts when markets opened. The Chancellor had strongly hinted at the move, telling the BBC that sticking with manifesto commitments would require 'deep cuts in capital spending'.
Government sources indicated the change of heart came after improved forecasts from the Office for Budget Responsibility (OBR) watchdog left her with a £20 billion black hole to fill – substantially less than initially feared. It had been widely expected that Ms Reeves would increase the basic rate of income tax for the first time in 50 years, raising it by 2p while offsetting this with a 2p cut in employee National Insurance to generate £6 billion.
Political Fallout and Market Reaction
The timing of the decision, following botched Number 10 briefings about a possible coup against Keir Starmer, led to accusations that Labour MPs feared losing their seats if the party broke its pre-election pledge not to take more money from workers. Shadow Chancellor Mel Stride told the Daily Mail: 'We are witnessing the most shambolic pre-Budget period in memory. The constant leaking, briefing and kite-flying is fuelling uncertainty and damaging our economy.'
Market confidence has plummeted to record lows according to business leaders. Nigel Green, chief executive of deVere Group, warned: 'This is exactly how credibility shocks begin. Bond traders are telling the Treasury that they will not tolerate mixed signals.' Former chancellor Sir Jeremy Hunt told Times Radio that the world is watching British economic decision-making and 'it looks very chaotic'.
Alternative Measures and Broader Consequences
While Treasury sources dismissed suggestions about changing income tax thresholds, Ms Reeves is now expected to freeze current bandings for several more years, a stealth tax that would pull millions into higher tax brackets. Instead of a single bold move on income tax, the Chancellor will need to find alternative ways to address the financial shortfall.
This opens the door to a raft of other revenue-raising measures likely including:
- Pay-per-mile charges for electric car drivers
- Higher gambling taxes
- Cuts to tax relief for workers using 'salary sacrifice' schemes for expensive bicycles
Polling by YouGov found that almost two-thirds of Britons (63%) believe the Government is handling the upcoming Budget badly, although most (58%) think not raising income tax is the correct decision. The Resolution Foundation's chief executive Ruth Curtice noted that 'it is not normal for so much of that to be laid bare in public,' highlighting the unusual transparency of the Treasury's internal deliberations.
