Budget Crisis Deepens as Chancellor Performs Dramatic Tax U-Turn
Financial markets have turned against the UK government today after Chancellor Rachel Reeves dramatically abandoned plans to increase income taxes in her upcoming Budget. The extraordinary reversal follows intense pressure from Labour MPs furious about breaking manifesto promises, creating one of the first major crises for Sir Keir Starmer's administration.
The Pound has already taken a significant hit following the overnight revelation of this policy shift, which comes after weeks of strong signals that the tax increases would proceed. This sudden change of direction leaves the Chancellor scrambling to find alternative methods to fill an estimated £30 billion black hole in the public finances, with less than two weeks remaining before she delivers her critical Budget statement.
Political Panic in Downing Street
The dramatic rethink appears to have been prompted by genuine panic in Downing Street about the threat to Sir Keir Starmer's leadership. Labour backbenchers had become increasingly vocal about their opposition to smashing key manifesto commitments on taxation, creating the prospect of a significant backbench rebellion that could destabilise the government.
Furious MPs have reportedly accused Number 10 of 'losing the plot', with particular criticism directed at Sir Keir's powerful chief of staff, Morgan McSweeney. The tension within government was publicly exposed during Wednesday's Prime Minister's Questions, where Sir Keir faced intense scrutiny over an apparent pre-emptive strike against Cabinet ministers considered potential leadership challengers.
The situation escalated when Health Secretary Wes Streeting - identified as the main target of these briefings - publicly demanded that the aides responsible be sacked and accused Downing Street of engaging in 'self-destructive' behaviour. Despite mounting pressure, Sir Keir has resisted calls to dismiss Mr McSweeney, though the episode has highlighted the Prime Minister's weakened position following a disastrous plunge in polling numbers.
Alternative Tax Measures Under Consideration
With the original income tax increase plan abandoned, the Financial Times reports that Ms Reeves is now examining alternative approaches to raise revenue. The most significant proposal involves cutting tax thresholds to drag millions more people into the tax system or push them into higher tax brackets.
This strategy would represent a substantial expansion of the controversial 'stealth raid' approach that has operated within the UK tax system for years. The Chancellor may attempt to argue that such measures technically adhere to manifesto promises, though critics would undoubtedly point out that 'working people' would still suffer significant financial consequences.
Ms Reeves is expected to adopt what insiders have described as a 'smorgasbord approach' - making multiple smaller adjustments around the edges of the tax code to extract additional revenue from both ordinary workers and wealthier individuals. Potential measures under consideration include implementing a new gambling levy and increasing taxes on expensive properties.
The division within Cabinet over the appropriate course of action has become so profound that Ms Reeves had reportedly prepared two completely different Budgets - one that openly breached manifesto commitments and another that navigated around their edges through alternative tax measures.
The Office for Budget Responsibility was informed of the Chancellor's change of heart on Wednesday, the same day that the leadership tensions within the Labour Party erupted into public view. This timing underscores the interconnected nature of the political and economic challenges facing the government.
Further complicating the Chancellor's decision-making, grim economic figures released on Tuesday revealed that unemployment has reached its highest level in more than four years, potentially giving Ms Reeves additional reason to reconsider tax increases that could further dampen economic activity.
Culture Secretary Lisa Nandy, appearing on broadcast interviews this morning, defended the Chancellor against suggestions that the government lacked direction. She told Sky News: 'I've known the Chancellor well for 15 years now, and I can tell you that she is solely and fiercely focused on the challenges facing the country and doing what is in the best interests of the country.'
Ms Nandy added: 'She's never been shy of facing people down in order to do that in opposition and in Government. Over the course of the last few weeks, obviously I've had some discussions with her and her team about measures in the Budget that may affect my department... and in every one of those discussions, it's been the public interest that she's completely focused on.'
The situation represents a remarkable turnaround for Sir Keir Starmer, who just 16 months ago entered Downing Street celebrating one of the largest election majorities in modern political history. The current crisis demonstrates how quickly political fortunes can change and the difficult balancing act facing a government attempting to reconcile electoral promises with economic realities.
