Today, the UK faced market turmoil after Rachel Reeves made a surprising decision to abandon plans for raising income taxes, a move prompted by internal dissent within the Labour Party.
The British Pound has already experienced a decline following this unexpected policy reversal, which came to light overnight. This shift occurred despite weeks of indications that the tax increase would proceed as planned.
The change in strategy appears to stem from concerns in Downing Street about the potential impact on Keir Starmer, as Labour MPs were angered by the possibility of breaking key election promises.
Now, the Chancellor is under pressure to identify alternative solutions to address an estimated £30 billion deficit in public finances, with the Budget presentation looming in less than two weeks.
According to the Financial Times, one option being considered involves lowering tax thresholds, which would bring millions more into the tax system—a significant expansion of the unpopular ‘stealth raid’ tactic that has been utilized for years.
Rachel Reeves’ rethink appears to have been prompted by panic in Downing Street over the threat to Keir Starmer (pictured together yesterday), with Labour MPs furious about the prospect of smashing manifesto promises
Furious MPs have accused No 10 of ‘losing the plot’, with fingers pointed at his powerful chief of staff Morgan McSweeney
Ms. Reeves might argue that sticking to the manifesto commitments remains intact, but critics are likely to counter that this approach disproportionately affects “working people.”
The Office for Budget Responsibility is said to have been informed of Ms Reeves’ change of heart on Wednesday.
That was the same day Sir Keir was battered at PMQs over an apparent No10 pre-emptive strike against Cabinet ministers threatening to challenge his leadership.
Health Secretary Wes Streeting – the main target – publicly demanded the aides responsible for briefings were sacked and accused Downing Street of ‘self-destruction’.
Sir Keir has batted away calls to fire his chief of staff Morgan McSweeney. But the episode underlined the weakness of his position following a disastrous plunge in the polls.
Just 16 months ago he was parading into No10 after winning one of the biggest election majorities in modern political history.
Grim figures released on Tuesday also revealed that unemployment had hit the highest level in more than four years, potentially giving Ms Reeves more pause for thought.
Ms Reeves is now expected to rely on what has been dubbed a ‘smorgasbord’ approach – tinkering around the edges of the tax code to milk more money from workers and the better-off.
Such measures could include a new gambling levy and higher taxes on expensive properties.
The Cabinet is said to be so deeply divided on what to do that Ms Reeves had written two Budgets, one openly breaking the manifesto and another skirting round the edges of it.
Touring broadcast studios this morning, Culture Secretary Lisa Nandy was asked whether the government had any idea what it was doing.
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.
‘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, proposals that we’re making, and discussions that ordinarily happen across Government, and in every one of those discussions, it’s been the public interest that she’s completely focused on.’
Earlier this month Ms Reeves was pictured leaving Downing Street with part of her diary visible, and the word ‘Thresholds’ to describe one meeting.
There was already a widespread expectation that the Chancellor would extend the long-running freeze on personal tax thresholds, introduced under the Tories.
Economists have warned that the number of those paying the 40p tax rate will top 10 million if that happens.
Almost one in five taxpayers will be dragged into paying 40 per cent or more tax on their income if, as expected, the Chancellor extends the ‘stealth tax’, the Institute for Fiscal Studies said.
Fiscal drag will mean even more of those in middle-class professions such as senior nurses, police officers and teachers pay the higher rate of tax.
For the first time since its introduction, all pensioners will also pay tax on their income from the full state pension in 2027-28 as a result, the think-tank said.
More minimum-wage workers will be pulled into paying tax due to frozen thresholds and substantial minimum wage rises, it added. And it said that a continuing freeze would mean more taxpayers are eligible for Universal Credit at a time when the benefits bill is increasingly unaffordable.
Extending the freeze on thresholds, brought in by Rishi Sunak in 2021, for a further two years until April 2030 would net her £8.3billion that year, according to the think-tank.
This is on top of the £42billion the policy is already expected to raise by 2027-28, when it was due to end.
A real-terms reduction in thresholds would mean anyone paying income tax or NI would see their taxes increase and also mean more taxpayers are dragged into higher tax brackets.
