Chancellor Rachel Reeves spent weeks preparing the ground for breaking Labour’s manifesto pledge not to raise income tax, but a dramatic U-turn this week saw the plan abandoned. Government insiders said the decision was driven by revised official forecasts showing a smaller fiscal shortfall of around £20bn, rather than the previously estimated £30bn.
However, some officials suggested the forecasts did not change drastically in the last week, and that the last-minute shift was motivated by a desire to avoid exacerbating political turmoil surrounding the government. “There are good economic reasons not to raise income tax,” said one government official. “But politics played a part – it always does.”
The U-turn came after Prime Minister Keir Starmer faced a political backlash following a botched attempt by aides to shore up his leadership. Reeves and Starmer agreed that the planned income tax rise should not go ahead, opting instead for a “smorgasbord” of other tax increases.
Among the options considered were freezing tax thresholds for longer, which would drag hundreds of thousands more people into paying income tax and raise an estimated £7.5bn. Other planned rises, such as removing tax breaks for professionals employed through partnerships, were scrapped after the Office for Budget Responsibility judged they would not raise significant money.
Reeves had signalled publicly that she was prepared to take tough decisions, telling the BBC on Monday: “It would, of course, be possible to stick with the manifesto commitments, but that would require things like deep cuts in capital spending.” The final budget is expected later this month.
