Chancellor Rachel Reeves has decided against increasing income tax rates, abandoning plans that would have broken Labour's manifesto pledge. This decision stems from updated economic forecasts indicating the national budget's "black hole" is smaller than initially feared, due to higher-than-expected wage growth boosting Treasury revenue.
Despite this, Reeves will still implement measures that increase the tax burden on workers. These include freezing tax thresholds, a "stealth tax" that means more people will pay higher taxes as their wages rise. She is also expected to introduce new restrictions on salary sacrifice schemes, such as those for pension contributions.
The move to avoid a direct income tax hike is intended to prevent a political backlash from voters and maintain trust in politics. However, the U-turn has caused market volatility, with falling stock markets and a rising pound, suggesting concerns about the government's fiscal discipline. Economists warn that this change in strategy could be risky, potentially leading to fears that the government lacks the appetite for difficult fiscal decisions or that the OBR's revised forecasts are not credible. Investors may also worry that a range of smaller, potentially more damaging taxes will be increased instead.
