Sir Keir Starmer and Rachel Reeves have dropped plans to raise income tax in the upcoming Budget, reversing a move that had spooked financial markets. The Chancellor had been expected to hike income tax to address a fiscal shortfall, but the decision was reversed amid fears of angering voters and Labour MPs.
Whitehall sources indicated that improved tax receipts and productivity forecasts have reduced the expected shortfall to around £20 billion, down from earlier estimates. The change was communicated to the Office for Budget Responsibility on Wednesday, with an amended list of major measures submitted for the Budget on November 26.
Raising income tax would have broken Labour's manifesto pledge not to increase rates of income tax, national insurance, or VAT. Labour's deputy leader Lucy Powell had warned that such a breach would damage trust in politics. Instead, the Chancellor may now rely on other tax rises, including a possible mansion tax on properties worth over £2 million and higher council tax bands for expensive homes, which would particularly affect London and the South East.
The U-turn triggered a sell-off in UK government bonds, pushing up borrowing costs. Yields on 30-year gilts rose by 14 basis points before settling seven points higher at 5.3%, while 10-year yields climbed six points to 4.5%. Sterling initially fell but later stabilised, and the FTSE 100 index dropped by around 150 points.
