In a dramatic reversal of fiscal policy, Chancellor Rachel Reeves has abandoned plans to increase income tax rates in her upcoming budget, following days of intense internal conflict within the Labour party.
Manifesto Pledge Protected After Internal Pressure
The bombshell decision represents a significant U-turn after both Prime Minister Keir Starmer and Chancellor Rachel Reeves had previously laid the groundwork to break a key manifesto commitment on taxes. According to sources speaking to the Guardian, the prime minister has now definitively ditched plans that would have seen income tax rates increased.
The reversal comes after what insiders describe as an extraordinary week of briefing wars within Labour, with allies of the prime minister suggesting he would vigorously contest any leadership challenge. The political infighting reached such intensity that Health Secretary Wes Streeting was forced to publicly deny speculation that he was positioning himself as a potential challenger to Starmer's leadership.
Downing Street officials declined to directly comment on the budget developments when approached, maintaining their standard position of not discussing fiscal matters ahead of the official announcement. However, they notably did not deny the reports that have sent shockwaves through Westminster.
Stealth Tax Alternatives Emerge
With the door closed on direct income tax increases, the Treasury is now exploring alternative revenue-raising measures. The Financial Times reports that Reeves may instead adjust the thresholds at which people begin paying tax - an approach likely to be perceived as an income tax rise by stealth.
Multiple sources close to the chancellor have emphasised her determination to maintain significant fiscal headroom in the budget, aiming to avoid persistent speculation about potential breaches of the government's own fiscal rules. This cautious approach reflects the Treasury's concern about market reactions to any perceived financial instability.
The need for alternative revenue sources has become increasingly urgent due to an anticipated multi-billion pound financial shortfall. This fiscal hole has been exacerbated by both a downgrade in productivity forecasts and U-turns on other flagship policies, including controversial cuts to winter fuel allowances and disability benefits.
Smaller Measures to Fill Financial Gap
Instead of major tax announcements, Starmer and Reeves are now expected to rely on multiple smaller tax-raising measures to address the budget deficit. Among the options under serious consideration are higher levies on gambling, a policy championed by former prime minister Gordon Brown.
These gambling levies have been proposed as a potential funding source for ending the two-child benefit limit, which represents another significant potential cost for the chancellor. However, Treasury sources have poured cold water on suggestions that gambling revenues could fully cover the expense of removing the cap, indicating that the financial maths simply doesn't add up.
The chancellor is already expected to extend a freeze on personal tax thresholds originally introduced by the Conservatives, a measure that will effectively increase tax receipts as inflation pushes wages higher.
The dramatic U-turn comes just ten days after Reeves appeared to signal impending tax rises during a Downing Street press conference. "As chancellor, I have to face the world as it is, not the world that I want it to be," she told journalists, in remarks widely interpreted as preparing the ground for tax increases.
In recent weeks, the Treasury had embarked on a charm offensive aimed at convincing Labour MPs of the necessity of breaking the manifesto pledge on income tax. Ministers and economists were deployed to roundtable events designed to persuade parliamentarians of the need for fiscal stability.
Despite Labour's substantial parliamentary majority, many MPs remained deeply concerned about the impact on their constituents and sceptical about the wisdom of abandoning such a significant manifesto commitment. This discontent with Starmer's leadership and political operation burst into the open over the tax plan, with some MPs openly discussing whether it could ultimately cost the prime minister his position.
Earlier this week, Downing Street mounted an aggressive operation to shore up Starmer's leadership, briefing the Guardian about the dangers of destabilising the government and insisting the prime minister would fight any challenge. However, these efforts spectacularly backfired when close allies of Starmer shared speculation about Streeting potentially mounting an imminent leadership coup.
According to reports, both Labour MPs and ministers - including some serving in the cabinet - were astonished by No 10's admission that the prime minister appeared vulnerable. Many now believe that the very action intended to protect Starmer's position may have inadvertently fired the starting gun on the race to succeed him.
