Chancellor Rachel Reeves has abandoned plans to raise income tax in the upcoming budget, a dramatic reversal after weeks of signalling that such a rise was necessary. The decision marks a significant shift in the government's fiscal strategy, as Reeves had previously indicated that breaking manifesto pledges might be unavoidable.
Internal government debates had divided opinion, with one camp advocating for an income tax rise to address the fiscal shortfall, while others warned it would be politically damaging. The decision to reverse course came after Prime Minister Keir Starmer faced a political backlash, and revised forecasts showed the government's shortfall was closer to £20bn than £30bn.
Government insiders confirmed that the U-turn was influenced by a desire to avoid exacerbating political turmoil. Officials noted that economic reasons also played a part, but politics was a key factor. The Office for Budget Responsibility had flagged a productivity downgrade leaving a £21bn gap, prompting consideration of various tax rises.
Among the options considered were freezing tax thresholds for longer, which could raise £7.5bn, and a proposal to raise income tax by 2p while lowering national insurance by 2p. Some planned tax rises, such as removing tax breaks for professionals in partnerships, were scrapped after the OBR judged they would not raise significant revenue.
Reeves had hinted at an income tax rise as recently as Monday, telling the BBC that sticking with manifesto commitments would require spending cuts. However, by Wednesday the chancellor and prime minister agreed to abandon the rise, opting instead for a 'smorgasbord' of other tax increases to meet fiscal targets.
