Chancellor Rachel Reeves, after weeks of speculation and suggestions of income tax hikes, has chosen not to pursue tax increases that would breach manifesto promises. Instead, she will seek alternative ways to generate revenue.
The initial plan was to increase income tax rates by 2p and simultaneously reduce National Insurance by the same margin, an approach designed by the Resolution Foundation to bridge a ÂŁ30bn gap in public finances, largely due to a dip in productivity. This â2 up, 2 downâ strategy was submitted to the Office for Budget Responsibility (OBR) for assessment earlier this month and aimed to raise funds primarily from non-wage income sources such as landlords and savers.
However, updated evaluations from the OBR suggest stronger-than-expected wage and tax receipt growth, narrowing the financial gap to about ÂŁ20bn. Consequently, this income tax plan has not been included in the latest proposals for OBR examination.
These adjustments in fiscal planning come amid the typical pre-Budget forecasting cycle. Yet, Reeves, in a BBC interview on Monday, hinted strongly at possible tax increases. Health Secretary Wes Streeting later affirmed the commitment to uphold election promises, stating that tax speculation underscores the challenging state of public finances and the chancellorâs resolve to adhere to fiscal regulations.
The comments from the Health Secretary come amid rumors of leadership ambitions from Downing Street and assertions regarding the prime minister and chancellorâs influence over bond markets.
By the week's end, the markets were unsettled due to the shift in income tax strategy. Though itâs risky to ascribe the power of debt markets to a singular motive, recent events have raised borrowing costs for the government. Following a Financial Times report on the dropped tax rate plan, there was a 0.12 percentage point rise in the 10-year gilt borrowing rates.
The markets, expecting lower Bank of England interest rates in light of a slowing labor market, had been bolstered by the chancellorâs assertive fiscal discourse. Reeves's readiness to endure political costs by potentially breaking tax-related manifesto promises to curb borrowing had been perceived positively by bond investors.