Workers have been warned they still face big increases in the cash they hand to the government despite Rachel Reeves dramatically ditching plans to hike income tax in the Budget.
The Treasury has made clear that the main rate will not be increased on November 26, despite weeks of heavy hints about the first rise for 50 years.
The U-turn followed a gathering Labour revolt against smashing the election manifesto, with No10 starting to panic about Keir Starmer‘s own survival. It caused chaos on markets, with investors pushing up the risk premium on UK debt.
Government sources insisted the change was because forecasts from the OBR watchdog were slightly less bleak than anticipated, with stronger wage revenues partly offsetting a productivity downgrade to leave a £20billion deterioration.
However, that would still leave Ms Reeves needing to close a fiscal gap of up to £40billion on November 26, as she has committed to rebuilding ‘headroom’ that has been wiped out by backtracks on policies such as winter fuel and benefits cuts.
The Financial Times said she is now looking at cutting tax thresholds to drag millions of people deeper into the system. That would represent a huge expansion of the hated ‘stealth raid’ that has been in effect for years.
Ms Reeves could then attempt to argue that the manifesto has been abided by – but critics would point out that ‘working people’ were suffering.
Treasury sources did not categorically deny the idea was on the table, acknowledging that she will still have to use ‘big levers’ to raise money, with ‘final decisions still to be taken’.
Julian Jessop of the IEA think-tank suggested that significant reductions would be needed to raise the same amount as a 1p increase in the basic rate of tax – £8billion.
The threshold for the higher rate could have to fall from £50,270 to about £46,000, and the top rate from £125,000 to £100,000. Estimates by the Mail indicate someone on £50,000 would face paying around £750 more tax a year.
Assuming the tapering off of the personal allowance still happened at the same point as the top rate takes effect, a £100,000 earner would see a £5,800 increase in their bill.
Rachel Reeves’ rethink appears to have been prompted by panic in Downing Street over the threat to Keir Starmer
Earlier this month Ms Reeves was pictured leaving Downing Street with part of her diary visible, and the word ‘Thresholds’ to describe one meeting
Furious MPs have accused No 10 of ‘losing the plot’, with fingers pointed at his powerful chief of staff Morgan McSweeney
Labour insiders are in despair about shambolic briefing ahead of the critical package, with blame being cast on Treasury minister Torsten Bell and No10 chief of staff Morgan McSweeney.
The Pound has taken a hit after the latest extraordinary U-turn emerged overnight. Interest rates on gilts – the main way the government borrows money – also spiked in early trading, although they eased back slightly after the Treasury issued a statement stressing the Chancellor’s determination to shore up the public finances.
Analysts warned that the UK could be facing a ‘credibility shock’ after the maelstrom of infighting and public contradictions. Even Labour’s favourite think-tank branded the situation ‘not normal’.
Ms Reeves’ shift in approach appears to have coincided with panic in Downing Street over the threat to Sir Keir.
Only last week the Chancellor was delivering a highly unusual pre-Budget speech warning that ‘everyone’ will have to ‘contribute’ to shoring up the government’s books. She then stated publicly that cutting capital spending would be the only way to abide by the manifesto promises.
That was universally seen as confirmation of broad-based tax increases.
Nigel Green, CEO of global financial advisory deVere Group, warned that ‘mixed signals’ were spooking the markets.
‘This is exactly how credibility shocks begin,’ he said.
‘Gilts are sliding, borrowing costs are climbing, and sterling is weakening because markets fear the government is improvising. There’s nothing investors hate more than indecision disguised as strategy.’
He added: ‘The reaction is unmistakable. Bond traders are telling the Treasury that they will not tolerate mixed signals. They saw what happened during the Truss turmoil and they’ll not wait politely for clarity. They’re pricing risk in real time.’
Even the Resolution Foundation think-tank, often favoured by Labour ministers, warned that the briefing risked damaging the country.
Chief executive Ruth Curtice said: ‘It is normal for economic forecasts and policies to change in the run up to the Budget.
‘It is not normal for so much of that to be laid bare in public. The market moves this morning and in recent weeks suggest a serious look should be taken at the approach to market-sensitive forecast information.’
One despairing government official told the Daily Mail of the turbulent Treasury process: ‘Ironic that this is the one where they introduced the idea of a Budget Board with Torsten in the chair to make the whole thing more orderly and consultative.’
The Office for Budget Responsibility was reported to have been informed of Ms Reeves’ change of heart on Wednesday – although Treasury insiders suggested it was earlier.
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.
Mr 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, insisting that the specific briefing against Mr Streeting did not come from No10 aides. 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.
Appearing on LBC Radio this morning, Mr Streeting welcomed the U-turn. ‘I’m not in favour of breaking manifesto pledges,’ he said.
‘I think that trust in politics and politicians is low and it’s part of our responsibility to not only rebuild our economy and rebuild our public services, but to rebuild trust in politics itself.’
He added: ‘The fact that the Chancellor – and we’re going on speculation here – but the fact that the Chancellor was reported as even considering breaking manifesto commitments tells you two things: Firstly, the public finances are under real pressure, and secondly she is fundamentally, unequivocally, committed to her fiscal rules and so therefore she’s got some invidious choices to make, and she’s weighing those up.
‘I’ve not spoken to the Chancellor overnight. I’ve seen the reports this morning that she’s no longer planning to increase income tax.
‘I think what the news overnight has shown is that people speculate on the Budget but ultimately you don’t know what’s in it until the day it’s delivered, and that includes the Cabinet, by the way.
‘So we will all have to wait and see.’
Labour insiders said Mr Streeting seemed to have a renewed belief he could take the top job from Sir Keir.
One government source told the Daily Mail: ‘If life hands you lemons…. And he’s been given the run of the orchard this week.’
A Labour former minister said Sir Keir needed to get rid of Mr McSweeney and start listening to his MPs.
‘If you’re in the spring in the Alps, and you fire a gun and there’s an avalanche – don’t be surprised,’ they said, referring to the briefing against Mr Streeting.
‘And don’t be surprised if everyone reacts to it.’
A senior Tory MP joked that ‘It Was Wes Wot Won It’
But Mr Streeting tried to play down the tensions, insisting: ‘I think the Prime Minister and I are both in the same boat here of being extremely frustrated because this is a total distraction.’
Asked if he had confidence in Mr McSweeney, the Health Secretary said: ‘Of course I do.’
The Health Secretary was also asked about a 2018 clip in which he suggested he would be the prime minister in 2028.
Mr Streeting said: ‘As has often been said, it will be my sense of humour that will ultimately do for me one day. But if you don’t back yourself, who will?’
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. And there was more evidence of an economic slowdown yesterday, with GDP essentially flatlining in the third quarter.
Ms Reeves is expected to take 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, as well as per mile charges for EVs.
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.
A Treasury spokesman said: ‘We do not comment on speculation around changes to tax outside of fiscal events.
‘The Chancellor will deliver a Budget that takes the fair choices to build strong foundations to secure Britain’s future.’
Tory leader Kemi Badenoch said Ms 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.’
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.
