Chancellor Reeves Backs Down on Planned Income Tax Rise Amid Market Volatility
London – chancellor Rachel Reeves has reversed course on a proposed income tax increase, abandoning a plan that woudl have breached a key manifesto promise. The shift comes after fluctuating assessments of the UKS public finances and a noticeable reaction from bond markets.
Earlier this month, Reeves presented the Office for Budget Obligation (OBR) with an option to raise income tax rates by 2p while concurrently cutting National Insurance by 2p. This “2 up, 2 down” plan, originally proposed by the Resolution Foundation think tank, was intended to generate several billion pounds, primarily from non-wage income like landlords and savings, to address a then-estimated £30 billion gap in public finances.This gap was largely attributed to a downgrade in productivity forecasts.
However, revised OBR assessments now project stronger wage growth and tax receipts, reducing the financial shortfall to approximately £20 billion. Consequently, the income tax rise was not included in the latest measures submitted to the OBR for analysis.
The reversal follows a period of mixed messaging. On Monday, Reeves strongly suggested in a BBC interview that tax rates would increase. This was followed by Health Secretary Wes Streeting’s comments on Friday, explicitly stating the importance of upholding manifesto pledges: “It is indeed really vital that we keep our promises and we stand by our manifesto… the chancellor is determined to stick to her fiscal rules.”
The uncertainty triggered volatility in the bond markets. Following a report in the Financial Times detailing the dropping of the tax plan, the effective borrowing cost for the government rose by 0.12% for a 10-year gilt. Markets had previously been reassured by Reeves’s commitment to tough fiscal measures, anticipating lower Bank of England interest rates due to a weakening jobs market. The initial willingness to potentially break a manifesto promise to restrain borrowing was viewed positively by investors.
