Rachel Reeves has decided against implementing a significant increase in income tax as part of the Budget. Treasury sources revealed that improved economic projections have narrowed the gap in public finances, allowing the Chancellor to forego the proposed tax hike.
Previously, Ms. Reeves had hinted at potential income tax rises on November 26, suggesting that the alternative would involve budget cuts. Despite efforts by ministers to rally support for the move, which would have contradicted Labour’s promise to shield working individuals from tax hikes, the plan was ultimately scrapped.
The Office for Budget Responsibility informed the Treasury that the deficit in public finances is closer to £20 billion, contrary to earlier estimates of £30-40 billion. This more optimistic outlook is attributed to robust tax revenues driven by higher wages, leading to increased tax payments, and a less severe decline in productivity than initially feared.
Although speculation caused some market turbulence over potential policy shifts, a government source emphasized the importance of transparency in addressing the financial challenges. While the Chancellor aimed to uphold the manifesto pledge and avoid unnecessary tax increases if possible, the source noted that difficult decisions lie ahead, with tax adjustments still under consideration.
In navigating the task of balancing the budget, Ms. Reeves is anticipated to reserve around £15 billion as a buffer against future economic uncertainties. One strategy being explored is extending the freeze on income tax thresholds, a move that could inadvertently push more individuals into higher tax brackets as their incomes rise.
Another option under review involves altering income tax thresholds while maintaining existing tax rates. Health Secretary Wes Streeting welcomed the decision to uphold Labour’s commitment and stressed the importance of rebuilding trust in politics and the economy.
Despite concerns raised by economists about the potential impact of policy shifts on investor confidence, the Treasury remains focused on presenting a balanced Budget to secure Britain’s future. The Resolution Foundation highlighted the need for greater stability in economic forecasts and policy communications to mitigate market uncertainties.