(Nov 14): Chancellor of the Exchequer Rachel Reeves has dropped plans to raise the headline rates of income tax in the coming UK budget, prompting a sharp selloff in gilts as investors questioned how she could make up for the revenue shortfall.
Reeves has decided not to go ahead with increasing either the basic or higher income tax rates after widespread concerns were raised internally about breaking Labour’s election promise not to do so, people familiar with the matter said.
She is also looking again at whether to proceed with an exit tax on wealthy people leaving the UK, and may water down a proposal to raise more money from professionals who use limited liability partnerships, the people said.
Gilts plunged at the open, sending the 10-year yield as much as 13 basis points higher to 4.57% — the biggest daily jump since July. The pound was the worst-performing major currency on Friday, falling 0.6% against the dollar.
A person familiar with the Treasury’s thinking said the chancellor had effectively drawn up two budgets, one which included the more controversial tax rises and another which consisted of other changes to the tax code and lots of smaller hikes. She had previously favoured the former option, but was facing political pressure to go for the second approach, they added.
The Financial Times first reported that Reeves was ditching the planned income tax rise. It said she could instead cut the thresholds at which people pay different rates of income tax. The Treasury declined to comment.
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The development comes just days after Prime Minister Keir Starmer’s government lurched into a new political crisis amid allegations that he was about to face a leadership challenge from a senior cabinet minister.
Bloomberg reported on Wednesday that Reeves has been unable to make final decisions on what policies to announce in part because of ongoing arguments in cabinet about what to do, according to people familiar with the matter.
The budget is due to take place on Nov 26 and so-called “major measures” were due to be finalised this week. Meanwhile, Reeves needs to fill a budget hole of as much as £35 billion.
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Cabinet ministers on both the right and left of the party are opposing different policies that have been reported in the media in recent weeks. A government official said senior members of the administration were concerned that Reeves appeared to be about to raise income tax without providing a compelling narrative to the public for why she was doing so.
With just two weeks to go until Reeves gives her statement, Treasury officials were still considering dozens of potential policy options, with more in play at this late stage than compared to previous budgets, people familiar with the matter said.
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