Reeves scraps proposed income tax hike in seismic u-turn ahead of Budget

It's been reported that Reeves and Prime Minister Sir Keir Starmer informed the Office for Budget Responsibility (OBR) that they would not be hiking rates on November 26.

Reeves had appeared to all but confirm she would be raising income tax last week, breaking from her party's 2024 election manifesto pledge.

The Chancellor had told the public in a Downing Street press conference last week that "everyone has to play their part" in fixing Britain's broken finances.

The speech was widely interpreted as confirmation that the Treasury would raise the basic rate of income tax by 2 per cent.

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On Monday she said that sticking to those commitments “would require things like deep cuts in capital spending” that could harm productivity growth.

An income tax rise would help her bridge a fiscal black hole estimated by some economists to be as much as £50 billion, but it would also break Labour’s clear manifesto pledge not to raise income tax, national insurance or VAT.

But the Financial Times has reported that she has now abandoned those plans over fears they could anger both voters and backbench Labour MPs.

The prospect of a manifesto breach drew criticism earlier this month from Labour’s new deputy leader Lucy Powell, who said it would damage “trust in politics”.

Having vowed not to return to “austerity” through deeper spending cuts, the Chancellor could now have to rely on increases in a wider range of smaller taxes if she is to stick to her self-imposed rules on debt and borrowing.

The Financial Times suggested that one option would also be to reduce income tax thresholds while keeping tax rates the same, which could raise billions of pounds for the Treasury.

Conservative leader Kemi Badenoch said the reported U-turn was “good (if true)”.

In a post on X, she said: “Only the Conservatives have fought Labour off their tax-raising plans.

“But one retreat doesn’t fix a Budget built on broken promises. Reeves must guarantee no new taxes on work, businesses, homes or pensions – and she should go further by abolishing stamp duty.”

Liberal Democrat deputy leader and Treasury spokeswoman Daisy Cooper described the move as an “11th hour screeching U-turn” but said struggling families could be spared “yet another punch in the stomach Budget”.

She said: “The Chancellor should look at our plan for a windfall tax on the big banks’ billions in profits and put £270 back into people’s pockets.”