Will Rachel Reeves’ tax U-turn be disastrous?

Chancellor Rachel Reeves has abandoned plans to increase income tax in the Budget on 26 November, and will instead focus on a range of smaller tax-raising measures.

The U-turn – leaked mere days after briefings about a plot to challenge Keir Starmer – comes after new Office for Budget Responsibility forecasts decreased the size of the economic “hole” Reeves needs to fill. This means she no longer feels under pressure to break Labour’s manifesto and put up income tax rates.

What did the commentators say?

The OBR told the chancellor that the hole in the public finances is now “closer to £20 billion than the £30 billion originally expected”, said Steven Swinford and Mehreen Khan in The Times. Reeves promptly ripped up the manifesto-busting plan she knew would “aggravate mutinous” Labour MPs and “fuel anger among voters”.

The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

Downing Street officials “insisted” the Budget re-write was not a “response to the leadership crisis that has engulfed Keir Starmer” this week, said George Parker, Anna Gross and Sam Fleming in the Financial Times. But the chancellor’s about-turn has had an immediate effects on the markets, with gilts having their “worst one-day sell off since September” when the news broke.

When Reeves finally delivers the Budget, she will probably favour a “smorgasbord” approach, raising money from multiple avenues, including levies on gambling and taxes on expensive properties. She is also expected to “extend a freeze on personal tax thresholds” for a further two years, pushing more people into higher tax brackets as their wages rise.

“Rachel Reeves is Queen of the U-turn,” said Harvey Jones in the Daily Express. “She was forced to backtrack” on scrapping the winter fuel payment” and “caved on” over proposed cuts to the “ballooning” benefit bill. In fact, she has been made “to correct everything from her CV and childhood chess achievements to claims she didn’t know she needed a licence to rent out her property”.

“It is a mess,” said Matthew Lynn in The Telegraph. The Budget is “turning into a shambles”. In a week of “in-fighting, plotting and leaks”, the chancellor is being “buffeted” by political events, instead of controlling them. The proposed “series of minor tax rises” to try to stay within the fiscal rules shows that her preparation has “descended into a farce”.

What next?

A gap of £20 billion is “still a big number”, said Pippa Crerar in The Guardian. In addition to freezing income tax thresholds, we should expect “taxes on salary sacrifice schemes” and even a “fuel duty equivalent for electric vehicles”.

Talk of a new “exit tax” on entrepreneurs leaving the country has dwindled somewhat, said Swinford in The Times, but, if it is brought in, it could have a “significant impact on investment and growth”, particularly “in the artificial intelligence and broader tech sectors”.