In a significant policy reversal, Chancellor Rachel Reeves has reportedly scrapped her plans to increase income tax in the upcoming Budget, a move that would have broken a core Labour Party manifesto commitment.
The Manifesto Pledge and Fiscal Pressure
The Chancellor had been widely anticipated to raise income tax to help bridge a substantial funding gap in her spending plans, estimated by some economists to be as large as £50 billion. Failing to find new revenue streams would have likely necessitated what she described as 'deep cuts' to vital public investment.
However, according to a report from the Financial Times, these plans have now been abandoned. The decision was driven by concerns over upsetting both voters and backbench Labour MPs, for whom the manifesto promise was a cornerstone of the party's election campaign. The commitment explicitly ruled out increases to income tax, national insurance, or VAT.
A Political and Fiscal Dilemma
The possibility of breaking this pledge had already drawn sharp criticism. Earlier this month, Labour's new deputy leader, Lucy Powell, warned that such an action would severely damage 'trust in politics'.
The Chancellor formally communicated her decision to the Office for Budget Responsibility on Wednesday, November 12, when she submitted the list of 'major measures' to be included in the Budget scheduled for November 26.
For the past month, Reeves had repeatedly refused to completely rule out income tax rises, despite the manifesto. She argued that adhering strictly to the commitments 'would require things like deep cuts in capital spending' that could harm the UK's productivity growth.
Alternative Strategies and Political Reactions
With the door closed on a major income tax rise and a pledge not to return to 'austerity', the Chancellor may now have to rely on a broader range of smaller tax changes. One option reportedly under serious consideration is freezing or lowering income tax thresholds while keeping the rates themselves unchanged.
This technical measure, known as 'fiscal drag', pulls more people into higher tax brackets as their wages rise with inflation and could raise billions of pounds to meet the Chancellor's self-imposed rules on debt and borrowing.
The political reaction to the U-turn was swift. Conservative leader Kemi Badenoch welcomed the news, calling it 'good (if true)' in a post on X. She stated, "Only the Conservatives have fought Labour off their tax-raising plans," but added that Reeves must now guarantee no new taxes on work, businesses, homes, or pensions.
Meanwhile, Liberal Democrat deputy leader Daisy Cooper branded the shift an '11th hour screeching U-turn'. She proposed an alternative, suggesting the Chancellor should implement a 'windfall tax on the big banks' billions in profits' to generate revenue instead.
