Chancellor of the Exchequer Rachel Reeves has reversed her plans to raise income tax, a decision that has left ministers, Members of Parliament (MPs), and financial markets in shock. This unexpected move, described by some as a “panic move,” is seen as an attempt to protect the leadership of Sir Keir Starmer amid rising pressure within the Labour Party.
The announcement came after reports emerged that Reeves was poised to break Labour’s manifesto pledge not to increase income tax. According to a Financial Times report, the chancellor had indicated a willingness to raise taxes in recent public appearances. Following this, the markets reacted sharply, with the cost of government borrowing rising, as 10-year gilts increased by 12 basis points to reach 4.56 percent.
Discontent within the party has been exacerbated by speculation regarding a potential leadership challenge. A briefing to journalists suggested that Wes Streeting, the Secretary of State for Health, was preparing to run for leadership, further intensifying the pressure on Starmer’s administration. One minister expressed concern to The Independent, stating that Downing Street is “gripped by a state of panic.”
Despite the backlash, Treasury sources claimed that the chancellor’s decision was influenced by better-than-expected economic data. Nonetheless, critics contended that interference from Downing Street played a significant role in the reversal. Reeves had previously set the stage for tax hikes, asserting that breaking the party’s election pledge was necessary.
Future Tax Strategies Under Scrutiny
The chancellor is now expected to explore other avenues for revenue generation, possibly through smaller taxes. Potential candidates include a gambling tax, a bank levy, various wealth taxes, or a mansion tax on properties valued at over £2 million. Economists have raised concerns that such measures could complicate the tax system and create inefficiencies.
Jim O’Neill, former Treasury minister and economic adviser, described the developments as “bothersome,” suggesting that reverting to less impactful taxes might hinder economic growth. Similarly, Stephen Millard, deputy director of the National Institute of Economic and Social Research (NIESR), warned that taking this approach could lead to a more complicated tax system, creating further distortions in the economy.
Tax expert Dan Neidle cautioned that relying on a mix of smaller tax measures might prove detrimental. Isaac Delestre, a senior tax analyst at the Institute for Fiscal Studies (IFS), noted the risks involved in raising significant funds through minor tax adjustments. He pointed out that reviewing income tax thresholds could yield more substantial revenue, as these thresholds have effectively decreased since 2021 due to being frozen.
According to Bloomberg, Reeves has received an updated fiscal forecast indicating that the public finances’ shortfall is now estimated at £20 billion, significantly lower than previous estimates of £30 to £40 billion. Ruth Curtice, chief executive of the Resolution Foundation, highlighted the unusual nature of the pre-Budget media briefings and public discussions surrounding economic policies.
Political Implications and Future Outlook
The sudden shift in tax policy has generated widespread criticism among Labour MPs. One MP remarked to The Independent, “I don’t think they have a clue. They’re making even good news look bad.” The decision regarding the income tax was communicated to the Office for Budget Responsibility on November 22, 2023, when Reeves submitted a list of major measures for her upcoming Budget, scheduled for November 26, 2023.
A spokesperson from the Treasury stated, “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.”
As the Labour Party grapples with internal tensions and external pressures, the implications of Reeves’ tax policy reversal remain significant for the government’s economic strategy and political stability. The upcoming Budget will be critical in determining the direction of fiscal policy and the Labour Party’s standing in the eyes of the electorate.
