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Chancellor Rachel Reeves has, after considerable speculation and strong indications that she might increase income tax rates in the upcoming Budget, ultimately chosen not to proceed with this manifesto-breaking proposal. This development comes amid widespread debate about the direction of fiscal policy, but some key details have emerged amid the uncertainty.
Earlier this month, a proposal known as the “2 up, 2 down” plan was submitted to the Office for Budget Responsibility (OBR) for costing. The plan, originating from the Resolution Foundation think tank, suggested raising income tax rates by 2 percentage points while offsetting this with a 2 percentage point cut to National Insurance contributions. This approach was intended to help close a then-£30 billion funding shortfall in public finances, largely attributed to weaker productivity growth. The strategy was designed to generate several billion pounds, primarily targeting non-wage income sources such as landlords and savings.
More recent OBR forecasts indicate an improvement in wage growth and tax revenues, which have significantly reduced the budget gap to around £20 billion. As a result, the income tax increase was omitted from the latest fiscal measures sent for analysis. Despite a BBC interview earlier in the week where the chancellor appeared to suggest income tax increases were imminent, Health Secretary Wes Streeting later emphasized the importance of adhering to manifesto commitments. He stated, “It is really important that we keep our promises and we stand by our manifesto. The fact that there’s been speculation about income tax shows how difficult the situation is with public finances and secondly that the chancellor is determined to stick to her fiscal rules.”
The back-and-forth on income tax policy has unsettled bond markets, which reacted nervously following reports that the tax rise plan was being abandoned. After the Financial Times broke the news, the effective borrowing cost on a 10-year government gilt rose by 0.12 percentage points. Investors had found comfort in the chancellor’s firm fiscal stance over recent weeks and anticipated Bank of England interest rate cuts amid a weaker labor market. The willingness to endure political costs by potentially breaching manifesto promises was seen as a reassuring signal for controlling government borrowing. However, the reversal in policy intentions, coupled with the withdrawal of other potential tax measures — such as increased levies on partnerships and entrepreneurs considering leaving the UK — has reignited market jitters.
Inside sources describe the chancellor’s overarching Budget plan as unchanged: to build a larger fiscal buffer or “headroom” above borrowing targets, expand efforts to address the cost of living crisis, and make “fair choices” on taxation. This approach likely includes prolonging the existing freeze on tax thresholds, which currently raises an additional £8 billion annually by pushing more taxpayers into higher brackets. Government officials emphasize that upcoming tax measures will focus on revenue from wealth, capital, and related income sources instead of wage increases. Nonetheless, leaks and discussions within Whitehall about broad tax reforms continue to impact market confidence. It remains important to note that Budget decisions are still being finalized, and all eyes are on November 26, when the chancellor will deliver her full statement
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