The Chancellor has abandoned plans to hike income tax at the Budget because of improved economic forecasting.
Rachel Reeves had been expected to hike income tax in the face of a yawning gap in her spending plans, hinting as recently as Monday that the alternative would be “deep cuts” to public investment.
But reporting overnight claimed she has abandoned introducing an income tax rise at the November 26 Budget over fears they could anger both voters and backbench Labour MPs.
The PA news agency understands the strength of tax receipts has improved the numbers from the Office for Budget Responsibility, allowing for the U-turn.
This is particularly the case on stronger wage performance: the higher wages are, the more tax is paid on them.
A downgrade in productivity is also not been as bad as was first feared.
While the Chancellor is no longer understood to be pursuing an income tax hike, tough choices are still said to lie ahead for the Government and other tax rises have not been ruled out.
Income tax thresholds could still be reduced while tax rates are kept the same, a move which could raise billions of pounds for the Treasury.
Limits to salary sacrifice schemes, as well as new measures to tax electric vehicles, are still in the mix as the Treasury pursues a “smorgasbord” approach to raising tax.
The Chancellor has not changed her approach, it is understood, and still intends to give herself larger fiscal headroom: the buffer against economic headwinds which could impact Government spending plans.
Ms Reeves has been laying the ground for tax rises over recent weeks, including during an early-morning speech aimed at preparing the public for the Budget.
The latest Budget measures were submitted last week, rather than being a knee-jerk response to the turmoil in No 10 this week sparked by a briefing war.
Government borrowing costs rose in the wake of the apparent U-turn on income tax on Friday morning.
Speculation about the change in direction sparked a sell-off in UK Government bonds, also known as gilts: the means by which the Government borrows money from private investors.
The gilt market later stabilised somewhat as the reasoning behind the Treasury’s decision-making became apparent.
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