UK borrowing costs have jumped and the pound has dropped after Rachel Reeves’ sensational U-turn on plans to raise income tax at the Budget.
Ms Reeves had been expected to hike income tax in the face of a yawning gap in her spending plans, hinting as recently as Monday that the alternative would be “deep cuts” to public investment.
But the Financial Times has reported that she has now abandoned introducing those plans at the 26 November Budget over fears they could anger both voters and backbench Labour MPs. Improved economic forecasting has also been cited as the reason behind the move.
The tax rise would break Labour’s election manifesto pledge not to raise income tax, national insurance, or VAT.
Following the reports on Friday, yields on 30-year gilts jumped by up to 14 basis points in early trading, and the yield on 10-year gilts also shot up 12 basis points – rising the most since July. The yield moves counter to the price of bonds, meaning that prices fall when yields rise.
The pound also felt an initial shock as the markets opened, but then started to recover.
Sarwar urges Reeves to scrap two-child cap in Budget
The leader of Scottish Labour has urged Chancellor Rachel Reeves to scrap the two-child benefit cap when she announces her Budget this month.
Anas Sarwar said on Friday he wanted to ensure the Budget would not see a “return to austerity”, reduced energy bills and tackled child poverty – which he said could be done by ending the cap.
Speaking during a visit in Glasgow, the Scottish Labour leader said: “I think three things have to come from that Budget.
“It has to be a budget that confronts child poverty, and that’s why I want to see the end of the two-child benefit cap.
“It has to improve living standards, that’s why we’ve got to have a package to lower energy bills.
“And third, we can’t return to austerity like we had under the Conservatives.
“That has to be the fundamentally different approach this Labour Government takes.”
Reeves’ former top adviser warns ditching tax rise will ‘overcomplicate’ system
Rachel Reeves’s former top adviser has joined leading economists in warning that her decision to abandon income tax rises in the upcoming Budget and pursue smaller interventions will “overcomplicate” the system.
Jim O’Neill, the former Treasury minister and Goldman Sachs boss who was brought in by the chancellor to be her economic adviser in opposition, described the developments as “bothersome”.
He said: “I’m surprised. If it means their defaulting to accumulated fringe, possibly growth-damaging taxes again, it will be bothersome.”
The taxes Rachel Reeves could raise after income tax hike abandoned
An income tax rise has reportedly been ruled out by Rachel Reeves in a last-minute turnaround ahead of the Budget, amid fears that breaking Labour’s manifesto pledge could anger voters and backbench Labour MPs.
Here are some of the other options the chancellor may be considering ahead of the Budget on 26 November:
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Badenoch calls on Reeves to ‘abandon all plans’ for tax rises
Tory leader Kemi Badenoch said Chancellor Rachel Reeves “needs to abandon all plans to raise taxes”.
Speaking on a visit to a generator hire firm in Writtle in Essex, Ms Badenoch said: “The problems we are having now were caused by her last budget.
“The last disastrous budget is creating a need for the new problems that she wants to create.
“What we’re asking her is to learn the lessons from that last budget and just stop the tax rises altogether.
“So if they’re not going to raise income tax, that’s good – I don’t know whether it’s true or not, we have to wait and see – but we need to be stopping them from taxing property, pensions, savings, the works.”
Government is focused on making ‘fairest possible choices’, culture secretary says
The Government is focused on making the “fairest possible choices” and easing “the pain that people have been put through”, Lisa Nandy said as she addressed reports suggesting a rise in income tax is now not coming at the Budget.
Chancellor Rachel Reeves had hinted at the tax rise, but media reports overnight claimed it has been dropped.
The Culture Secretary told Times Radio: “Of course, as you allude to, we don’t pre-empt budgets. Budgets are announced by the Chancellor.
“They’re the subject of a lot of work and careful consideration and, in our case as a Government, about making the fairest possible choices so that we can help the economy to grow, and we can also ease the pain that people have been put through over the last decade-and-a-half.”
Ms Nandy added that when the Budget is set out in “concrete details” on November 26, ministers will “make sure that those with the broadest shoulders bear the greatest burden in order to turn around the mess that we inherited and get the economy growing”.
Chancellor remains ‘completely focused’ on public interest, Nandy insists
The Chancellor remains “completely focused” on the public interest, Lisa Nandy said as she faced questions about reports an income tax hike will be dropped from the Budget.
The Culture Secretary told Sky News it would not be “helpful or right” to speculate about what is in the 26 November announcement.
Asked if the latest speculation made it look like the government did not know what it was doing, Ms Nandy replied: “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.”
Downing Street insists chancellor’s 4 November speech ‘still stands’
Downing Street insisted that the Chancellor’s speech from 4 November “stands”, amid speculation she has U-turned on plans to raise income tax.
The Prime Minister’s official spokesman said: “She was very clear about the challenges the country faces and her priorities in addressing those challenges. All of that still stands.”
No 10 declines to comment on income tax U-turn reports
Downing Street declined to comment on reports the Chancellor has U-turned on plans to raise income tax.
The Prime Minister’s official spokesman said: “We don’t comment on speculation around tax or changes to tax outside of fiscal events.
“The Chancellor has been clear on the need to deliver stability in the public finances.
“As she said last week, one of the objectives of the Budget is to build more resilient public finances with the headroom to withstand global turbulence, which would give businesses the confidence to invest and leaving the Government freer to act when the situation calls for it.
“And in two weeks’ time, the Chancellor will deliver a Budget that takes the fair choices to build strong foundations to secure Britain’s future.”
Hole in public finances is £10bn lower than thought, fiscal watchdog reportedly told Reeves
Rachel Reeves is reported to have abandoned her plans to hike income tax due to improved economic forecasts.
The chancellor was told by the Office for Budget Responsibility this week that the hole in the public finances is, in fact, now nearer to £20 billion, according to The Times. It was previously thought to stand at £30 billion.
Ms Reeves is looking to raise another £15 billion, which would act as a buffer for the future, the newspaper added.
The chancellor is reportedly still set to implement a so-called stealth tax by introducing a two-year extension on the current freeze on income tax thresholds, raising around £8 billion, as well as targeting people’s pension contributions.
