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The Guardian - UK
The Guardian - UK
Politics
Andrew Sparrow

Treasury won’t cut threshold for higher rate income tax, say sources – UK politics live

FT Rachel Reeves Income Tax United Kingdom Faisal Islam Kemi Badenoch Sir Keir Starmer Wes Streeting Downing Street (Organization)
Keir Starmer and Rachel Reeves on a visit to a Welsh factory on Thursday
Keir Starmer and Rachel Reeves on a visit to a Welsh factory on Thursday Photograph: Temilade Adelaja/AFP/Getty Images

How Reeves suggested to MPs last year a further freeze in tax thresholds would breach Labour's manifesto pledge

If the tax threshold freeze is now one of the key features of the budget, this creates a new problem for Rachel Reeves. As the Conservative MP Neil O’Brien points out, in her budget speech last year Reeves said this was a measure that would hurt working people. Reeves told MPs:

The previous government froze income tax and national insurance thresholds in 2021, and then did so again after the mini-budget. Extending their threshold freeze for a further two years raises billions of pounds – money to deal with the black hole in our public finances and repair our public services.

Having considered the issue closely, I have come to the conclusion that extending the threshold freeze would hurt working people. It would take more money out of their payslips.

I am keeping every single promise on tax that I made in our manifesto, so there will be no extension of the freeze in income tax and national insurance thresholds beyond the decisions made by the previous government.

From 2028-29, personal tax thresholds will be uprated in line with inflation once again.

When it comes to choices on tax, this government choose to protect working people every single time.

This passage is particularly significant because in it Reeves seems to be accepting that extending the income tax threshold freeze would be at least an implicit breach of the Labour manifesto promise (see 8.57am for the wording) – and arguably an explicit one, if “Labour will not increase taxes on working people” is seen as the operative part of the pledge.

Updated

Reeves's U-turn on income tax rates leaves £7.5bn thresholds freezes as one of key tax rises in budget

As Kiran Stacey, Richard Partington and Rowena Mason report, the decision by Rachel Reeves not to raise income tax in the budget means that freezing tax thresholds for another two years will be one of the most prominent revenue-raising measures she will announce.

Earlier I quoted Luke Tryl, the More in Common polling expert, arguing that breaking an explicit manifesto promise on tax would have been perilous for Labour. (See 9.42am.)

For an alternative view, do read this thread on Bluesky by Rob Ford, a politics professor and one of the authors of The British General Election 2024, the latest in the Nuffield series of authoritative, academic election histories.

Notwithstanding what Labour promises, Ford says at the last election voters expected Labour to put taxes up, and believed that they should put taxes up.

Firstly, voters said at every point in the campaign that they expected Labour to put taxes up. Labour’s manifesto pledges had no discernable effect on this expectation. Nor did the Tory “tax attacks” after the first debate. Its just a flat line saying “we expect Labour to increase tax & spend”

Secondly, voters said at every point in the campaign that they believed the government *should* increase taxes and spending. They expected Labour to increase tax and *they agreed with that idea*. Look at the red lines and the blue lines - which is closer to the black line (average voter preference)?

Some Labour MPs have argued that, if Labour were to put up income tax in the budget, it would be punished by the electorate just as the Lib Dems were after voting to raise tuition fees.

Ford says that this argument is based on a false understanding of why Lib Dem support collapsed before 2015.

Another argument you see often re: manifesto pledges is “look at what happened to the Lib Dems. That proves breaking a high profile manifesto pledge is electoral suicide.” Except...that’s not what the polling story of 2010-15 shows at all.

The Browne review reported in October 2010, and the govt adopted its recommendations in Nov 2010. The vast majority of the LD fall in the polls happened *before* this. The Lib Dems paid an electoral penalty for forming a coalition with the Conservatives, a party much of its 2010 electorate disliked

Tuition fees were not the *reason* for LD poll collapse, which came before the decision was made. But they subsequently became a *rationalisation* for switching among voters who had already turned against the party. The broken pledge didn’t drive the slump, though it may have made recovery harder.

Ford concludes that, for Labour, keeping the promise on “change” may be more important than keeping the promise on income tax.

I suspect it would be similar for Labour. But Labour have to weigh the promise not to raise the main taxes against the equally high profile, and endelessly repeated, promise to deliver “change”. If delivering change is impossible without raising tax, then its pick your poison time.

Labour seem to have decided, this week, that the electoral punishment for breaking a promise no one much expected them to keep when they made it will be bigger than the punishment for failing to deliver on the core premise of their whole campaign (the slogan was “Change”). I’m not so sure.

Your Party suffers fresh blow as independent MP Adnan Hussain leaves steering group condemning its 'toxic' culture

Yesterday a fresh split emerged at the top of Your Party, the new leftwing party supposedly being set up by Jeremy Corbyn and Zarah Sultana. As Nadeem Badshah reports, the dispute is about money donated by supporters held in an account controlled by Sultana which her colleagues are now saying should be transferred to the main Your Party account.

In the Commons Sultana, who was elected as Labour last year but lost the whip, sits with the five Independence Alliance MPs who were all elected last year as pro-Gaza independents. They are: Shockat Adam, Adnan Hussain, Ayoub Khan, Iqbal Mohamed, and Jeremy Corbyn, the former Labour leader. Yesterday all five put out a joint statement urging Sultana to transfer the funds. (She says she is doing this, but that it is just taking some time for administrative reasons.)

Today, in an open letter, Hussain says he is stepping away from the Your Party steering group because he has become disillusioned by the infighting, and alarmed by some of the views he has encountered. He says:

The culture surrounding the party has become dominated by persistent infighting, factional competition, and a struggle for power, position and influence rather than a shared commitment to the common good. Instead of openness, cooperation and outward focus, the environment has too often felt toxic, exclusionary and deeply disheartening.

I have also been deeply troubled by the way certain figures within the steering process, particularly Muslim men, have been spoken about and treated. At times, the rhetoric used has been disturbingly similar to the very political forces the left claims to oppose. I witnessed insinuations about capability, dismissive attitudes and language that carried, at the very least, veiled prejudice. This was especially painful given that these individuals, amongst them myself, achieved something remarkable: winning seats, against all odds, in long-established Labour strongholds through sheer grassroots hard work, community credibility and determination, without party machinery or institutional support.

The leftwing Labour MP Richard Burgon has welcomed the news that Rachel Reeves won’t raise income tax in the budget.

Raising income taxes on working people would’ve been totally wrong - so it’s good if that’s been dropped.

Here’s 3 fairer alternatives:

A Wealth Tax of 2% on assets over £10m → £24bn/yr

Equalising capital gains & income tax → £12bn/yr

Windfall Tax on banks → £14bn/yr

Greens celebrate gaining Lib Dem seat in council byelection, with big swing from Labour

There were five council byelections yesterday. Election Maps UK have the results.

The Greens held one seat, and gained another, from the Lib Dems.

Commenting on these results, Zack Polanski, the Green party leader, said:

People have tried to say that the Green surge is just on social media.

Or in a bubble that’s just about polls and just about new members.

Yet up and down the country - Greens are also winning elections.

Huge congratulations to Canterbury Greens!

Reform UK gained one seat from the Conservatives.

Election Maps UK says this is the highest Reform vote share in any election ever.

The Lib Dems held one seat.

And Plaid Cymru held one seat.

Updated

According to Ben Riley-Smith and Daniel Martin in the Telegraph, one reason why Rachel Reeves abandoned her plan to raise income tax in the budget was because she was told it would raise less money than expected. In their story, they say that the plan to raise income tax by 2p in the pound, offset by a 2p in the pound cut in national insurance, was included in the list of major measures sent to the Office for Budget Responsibility. The policy was supposed to raise £6bn. Riley-Smith and Martin say:

The Treasury included a version of this plan in the major measures submission to the OBR, after which sources say two things changed.

Firstly, the OBR said the move would raise less money than expected. Secondly, there were improvements in other economic metrics.

Wage growth was proving to be stronger than had been expected for months, meaning that the Treasury was getting in more money on that front than had previously been believed, and the black hole in the public finances that Ms Reeves needed to fill was more like £20bn by the end of the decade than the £30bn that was previously feared.

Jeremy Hunt, the former Tory chancellor, has told Times Radio that he thinks there are too many leaks coming out of the Treasury. He said:

There are always some leaks, but it appears that there’s a huge amount of leaks coming from the Treasury. And the Treasury normally has a reputation of being one of the most tight departments. And the budget decisions are kept to a very restricted number of people.

But for some reason, these leaks have been coming out thick and fast. And I think that does make the process feel a lot more chaotic ….

I do think that there is a leakiness now, which is making it difficult. Remember, the whole world is reading this information and they’re looking at British economic decision making. And it looks very chaotic and I don’t think that’s a good thing.

Government sources are briefing (eg here and here) that the Treasury income tax budget U-turn was not related to Keir Starmer’s leadership being under pressure.

But not everyone is convinced. This is what Jim O’Neill, the former Goldman Sachs chief economist who served as a relatively apolitical Treasury minister for a year under David Cameron (in the Lords he’s now a crossbencher) told the World at One about the shift.

When I reflect on it, it’s pretty hard to escape the conclusion that the change of mindset is being done because of the divisions inside the Labour party, which one can get. But, if you are trying to run a country with the tricky challenges that we have, I think you’ve got to be very careful to not send messages to financial markets that you are going to put party consolidation ahead of fiscal credibility.

O’Neill also said that the U-turn made him wonder whether the government had the will to push through difficult decisions. Asked if he thought it had the “steel” needed for further reforms, he replied:

If we would have had this conversation two weeks ago, I would have said to you I think that they have developed the steel. But, looking at some of the other shenanigans going on with briefings in Number 10 and now this, it bothers me.

I hope I will be pleasantly surprised. But if this is how it’s going to go, I’m disappointed and a bit concerned.

If you are looking for some more uplifting political news today, Amy Sedghi is reporting that Larry the Cat will soon be the longest continuous resident of Downing Street since Pitt the Younger. He is also one of the most admired. She has written a lovely piece about him, which is illustrated for her with good video footage too. (Larry v the fox is especially fun – Larry wins.)

Updated

In her analysis of the income tax budget U-turn, Beth Rigby from Sky News says that there is anger in Downing Street about the fact that the news leaked last night. She says No 10 did not want the news to come out now and that Keir Starmer had been planning to give a speech on this next week.

Whether or not that speech will still go ahead is not clear.

Government urged to take control of assisted dying bill as peers warned 900-plus amendments could sink it

The assisted dying bill risks running out of time to become law, the Lords has heard amid a record high number of suggested changes to the draft legislation. In its report on the commitee stage debate on the bill in the Lords, PA Media says:

Peers began their first of at least four days of detailed line-by-line scrutiny of the bill which could see assisted dying legalised for terminally ill adults in England and Wales.

More than 900 amendments have been put forward – the highest number ever tabled to a piece of backbench legislation.

The Dignity in Dying group, which campaigns for a change in the law, has warned “the risk of deliberate time-wasting is clear and profoundly unfair”.

But a number of peers told Friday’s debate they can only support bills which are “legislatively fit to be passed”, describing this one as “demonstrably flawed”.

The terminally ill adults (end of life) bill will become law only if both the House of Commons and House of Lords agree on the final drafting of the legislation – with approval needed before spring when the current session of parliament ends.

Gisela Stuart said there are “so many flaws” with the bill in its current form “that I don’t think this house, however long we debate it, can actually get it to a stage where it is legislatively fit to be passed, and that is our role”.

She told her colleagues on the Lords’ red benches: “We should not vote for anything that cannot legislatively be properly implemented.”

Andrew Tyrie said while he is a supporter of the bill’s intentions, it is “demonstrably flawed”.

He suggested the government must take more control of the draft legislation, which is currently proceeding through Parliament as a private member’s bill (PMB).

With less time allocated compared with government legislation, it can be more vulnerable in the face of any delays during the parliamentary process.

Tyrie said: “Surely the government should now be listening. They should now be grasping that they need to take this Bill in themselves … I think attempting to deal with these 900 amendments in this way is going to end up with the bill being talked out.

Former Paralympian Tanni Grey-Thompson urged the government to say what is “going on behind the scenes” to implement assisted dying.

A vocal opponent of the bill, the crossbench peer said she recently met a member of the public in the City of London, who said he was working “full time” on the rollout, adding: “I’m not sure he meant to tell me that.”

She told peers: “I think we do need to understand how many civil servants are currently working on this. Who’s running the Bill team?”

According to the parliamentary authorities, while some bills have had more amendments tabled in total at committee stage, this sets a possible record for the number submitted in the first full list of suggested changes and is almost certainly unprecedented for committee stage of a private member’s bill.

Not all tabled amendments will necessarily be debated as members can choose to withdraw theirs during the process.

The list of all 942 amendments that have been tabled is here. It runs to 234 pages.

The leftwing Labour MP Clive Lewis has welcomed the news that Rachel Reeves won’t raise income tax in the budget. But he is not impressed by her budget strategy.

It’s being trailed in the media that the chancellor won’t, after all, break the manifesto pledge on income tax. If that holds, I welcome it. Breaking the pledge would drive yet another nail into the coffin of political trust. That damage would’ve been worse if a rise came without (still needed) matching action on income from wealth, or on profiteering in energy, food and housing. As I say in this clip from the Daily Politics, what we’re getting now is “a rolling PR campaign with a spreadsheet attached”, not a considered economic or political strategy.

This isn’t an economic strategy. It’s a stream of conflicting press releases held together by a spreadsheet. It doesn’t build confidence & it cracks the Chancellor’s own austerity-driven fiscal rules

So change the rules

Support people, small business & rebuild public services

Badenoch claims BBC employs too many people who are activists, not journalists, and calls for 'root and branch reform'

In her broadcast clip, Kemi Badenoch said that the BBC was right to apologise to President Trump over the mistake in the way his 6 January 2021 speech was edited for a Panorama documentary and she said she hoped that Trump would drop his threat to sue the corporation over this.

Asked if she would ask Trump to drop his legal action if she were prime minister, Badenoch replied:

If I was prime minister, the BBC would not have got away with putting out a documentary that had fake news in it, so we wouldn’t be in this mess in the first place.

The BBC needs root and branch reform.

I’m glad that the head of news has resigned, but as we have seen with their coverage on the Middle East – it’s not just the coverage with the US, you look at the coverage even on basic issues, like biological fact on sex and gender – the BBC has been a mess.

They have a lot of people there who are not journalists but are activists. They need to be put under control immediately.

Updated

Plaid Cyrmu is also saying the government’s budget planning has been a mess. This is from Ben Lake, the party’s Treasury spokesperson at Westminster.

A budget rewritten in panic cannot deliver for Wales. When the chancellor rips up major proposals less than a fortnight before budget day – triggering a sell-off in government bonds – it shows something is fundamentally broken at the heart of this UK Labour government.

Wales needs stability and the ability to plan ahead. Instead, we’re handed a budget reshaped on the hoof to contain Labour infighting – not to meet the needs of Welsh communities.

This is no way to run an economy, especially when devolved public services rely on predictable funding. When Westminster uncertainty pushes up borrowing costs, it’s our communities that pay the price.

Updated

Badenoch claims she has never seen 'this level of chaos' ahead of a budget as Labour showing now

In a statement last night Kemi Badenoch, the Conservative leader, said it was “good” if Rachel Reeves has ruled out putting up income tax. (See 8.40am.)

This morning she said the government was being “completely irresponsible”.

In a clip for broadcasters, asked about the overnight story from the Treasury about income tax not going up, she said:

It’s quite clear that the government doesn’t know what it is doing.

What they have announced today is completely irresponsible, given all of the announcements about all the tax rises they’re going to raise.

It’s very clear that they’re in a mess. They’ve been talking about tax rises on income tax for ages now, weeks and weeks throughout the summer. Now that they’re saying no.

It’s good if they’re not going to increase income taxes. But the truth is they shouldn’t be increasing any taxes at all.

But I’ve never seen a government do this in the run-up to a budget. I have never seen this level of chaos, this level of irresponsibility.

The two statements aren’t completely incompatible – Badenoch’s overall point is that Tories don’t approve of tax rises, and they think the government’s handling of this has been a mess – but you could be forgiven for being confused

Badenoch also said this was a “government in chaos”. She explained:

The day before yesterday, the prime minister had to refer himself to a standards adviser. He’s got three or four members of his cabinet who are being investigated for all sorts of things. You look at what happened the day before yesterday, hearing about a coup. Some cabinet ministers want to overthrow the prime minister. They are not focused on running the economy.

Too much market-sensitive economic forecast information getting out ahead of budget, says thinktank

The Resolution Foundation has expressed concern about the amount pre-budget briefing that has come out this year about the financial forecasts. This is from Ruth Curtice, the thinktank’s chief executive.

At the budget the chancellor needs to do three things: take decisive steps to improve the public finances and increase the financial buffers against her fiscal rules; address cost of living pressures for families and support the Bank of England in lowering inflation; and in the interest of growth make tax changes that improve the system overall.

There is more than one way to skin this particular cat, and we won’t know until we see the whole package whether she has achieved these three objectives.

Much depends on the forecasts from the Office for Budget Responsibility. A significant economic deterioration would leave the chancellor choosing whether to break the spirit or letter of her manifesto pledge on income tax. A more benign economic outlook will make it far easier to avoid breaking it at all.

It is normal for economic forecasts and policies to change in the run up to the budget. It is not normal for so much of that to be laid bare in public. The market moves this morning and in recent weeks suggest a serious look should be taken at the approach to market-sensitive forecast information.

Ed Conway from Sky News was making a similar point earlier. (See 11.38am.)

Updated

Treasury not considering cutting thresholds for higher rates of income tax, sources say

This is from Pippa Crerar, the Guardian’s political editor, on where we stand this morning after all the fallout from the budget income tax U-turn. She confirms that sources are now ruling out cutting the thresholds for paying higher rates of income tax.

She says government insiders claim the change is all down to better-than-expected fiscal forecasts, and that Labour opposition to the proposal was not a factor.

Where we are on budget after revelation Rachel Reeves will no longer hike income tax rates

- Treasury confirms that stronger than expected OBR forecasts means fiscal gap is closer to £20bn than previously speculated £30-£40bn. Reeves also wants headroom of around £15bn in addition.

- This means Reeves does not need to become first chancellor in 50 years to raise basic rate on income tax - breaching a central manifesto promise.

- Improved forecasts are result of stronger wage growth (and therefore higher tax receipts) which started to feed into figures last week.

- But £20bn is still big number - so expect income tax thresholds to be frozen for another two years, taxes on salary sacrifice schemes, fuel duty equivalent for electric vehicles - plus ‘smorgasbord’ of other measures.

- As per previous post, I’m told that income tax thresholds will not be cut, despite speculation.

- Govt insiders say decision to drop income tax plan is nothing to do with political fall-out after Reeves publicly signalled manifesto breach - causing huge anxiety among Labour MPs (which ultimately fed into No 10’s extraordinary attempts to shore up PM).

- They defend decision to ‘roll the pitch’ on income tax rises - saying at that point they thought it might be necessary and leaving it to just before budget would’ve spooked MPs and markets.

Here is the clip of Wes Streeting denouncing striking doctors on LBC earlier. See 11.26am for the full quotes.

The Liberal Democrats are urging Rachel Reeves to face the press and explain her plans today. Sarah Olney, the party’s business spokesperson, said:

The chancellor gave a press conference to trail her income tax hikes. She must come before the British public today, unroll that particular pitch and come clean on what on earth is going on at the Treasury.

Ed Conway, Sky News’s economics editor, says a Bloomberg report saying the fiscal forecast is better-than-expected (see 9.03am) led to gilt yields coming down a bit (see 9.31am).

Here is my colleague Kiran Stacey’s take on what we know about the budget.

Some things to bear in mind about these late changes to the budget:

1) Govt sources say the forecasts changed. But the only new thing they learned this week was the OBR’s assessment of their own plans.

Maybe the OBR said their tax rises would raise more than expected?

2) Three major tax-raising measures now at the heart of the budget:

- Freezing tax thresholds - raises an estimated £7.5bn

- Ending salary sacrifice benefits for pensions - £2bn

- Tax on EVs - £2bn

3) We’re now told the black hole needing to be filled is around £20bn. Plus the chancellor wants to increase her headroom.

So where is the rest of the money coming from?

The BBC’s charter review will examine political appointments to the broadcaster’s board, Lisa Nandy has said, as they have “damaged confidence and trust”, Jamie Grierson reports.

Yesterday and this morning some of the political editors were being briefed that Rachel Reeves was considering lowering higher income tax thresholds in the budget (see 8.57am, 9.03am and 10.20am.)

Now other political editors (see here and here, for example) are being told that is not happening.

That suggests that the line has either changed, or been clarified, as the morning has gone on.

The Treasury is not saying any of this on the record. That is normal with a budget. But that does not mean they don’t talk to journalists, and it does not mean don’t think hard about how letting the City know what to expect. It is important that when the budget does get announced, the markets don’t get a nasty shock.

This is from Ed Conway, Sky News’s economics editor, on the market volatility ahead of the budget.

I’ve been reporting on UK Budgets for decades.

So perhaps worth underlining something: this degree of market volatility ahead of a Budget is NOT normal.

Underlines the extent to which UK has been in the bond vigilantes’ crosshairs, since the mini Budget.

This could get v bumpy

Mahmood to unveil anti-migration measures modelled on Danish system

Shabana Mahmood, the home secretary, is due to announce sweeping changes next week aimed at making the UK less attractive for migrants and modelled on the Danish system, Jamie Grierson reports.

Voter would oppose a 1p in the pound rise in the basic rate of income tax by 64% to 25%, YouGov polling suggests.

Streeting says striking doctors 'extremely irresponsible' in angry exchange with caller on LBC phone-in

Resident doctors in England have started a five-day strike today.

In his LBC phone-in this morning, Wes Streeting, the health secretary, accused the resident doctors of being “extremely irresponsible” in an angry response to a caller, Niraj, from Harrow in north London, who said that he and his colleagues did not want to be on strike, that they cared about patient safety, but that they had been forced to act because the government was not addressing their concerns.

Streeting replied:

On every single one of those fronts, on pay, on specialty training, places, on improvements to conditions, I have been working to address every single one of those issues. These are not the conditions in which people go out on strike.

Strike should be a last resort, and I’m sorry, but when you say ‘I don’t want to be out on strike today’, yes, you do, because you have made that choice.

You have done so having had a 28.9% pay rise, the highest in the public sector, two years in a row, and on those things that you’ve just mentioned, you say they take time.

Yes, they do, because it is complicated.

So, to hold patients to ransom and to be out on strike, setting back the NHS, because you don’t think we’re going fast enough, and because the leadership of your union are not honest enough that some of this change takes time, is extremely irresponsible.

It is extremely unnecessary and the other listeners to this show who have not had a 28.9% pay rise, whose taxes are paying for our National Health Service and who are receiving a substandard service, not least because of the damage that these rounds of industrial action are doing, I think they will be quite shocked, actually, that against the backdrop of a health secretary that wants to work with you, who acknowledges these are challenges and wants to address them, and has given you the biggest pay rise in the public sector two years in a row, I think people will be shocked by the BMA’s reprehensible behaviour.

Don’t tell me you don’t want to be out on strike, because that’s exactly where you are. You made that choice, own it and own the damage it will do to your patients.

UPDATE: See 12.23pm for the clip.

Updated

Andrew Fisher, who was head of policy for Jeremy Corbyn when he was Labour leader, has expressed concern about the reports saying Rachel Reeves might use fiscal drag as a way of compensation for not putting up income tax. (See 10.20am.)

The proposal seemed to be raising income tax rates but offsetting with NI cut (as per @resfoundationproposal) to protect low and middle incomes

Now plan seems to be to freeze income tax thresholds which hits lower and middle incomes

Make it make sense!

Also there is nothing remotely honest about pledging not to raise income tax, and then freezing the threshold so that people pay more income tax.

Stealth tax rises are probably more damaging to trust than openly and honestly arguing for clear rises.

Streeting says he and Starmer both 'extremely frustrated' by this week's No 10 briefings

In his LBC phone-in this morning, Wes Streeting, the health secretary, was asked what happened when Keir Starmer phoned him on Wednesday night. Starmer apologised to Streeting, No 10 said. This happened after No 10 sources were reported as saying that Starmer was getting ready to fight off a leadership challenge, with Streeting being identified as the person most likely to mount such a challenge.

Streeting said he did not want to discuss the call.

But, asked to comment on Starmer’s “tone”, Streeting said it was “as nice as usual”.

Asked if Starmer was “apologetic”, Streeting replied:

To be honest, I think the prime minister and I are both in the same boat here of being extremely frustrated because this is a total distraction. And I just say – the season finale of the of The Traitors is over and it’s time we focused on the news.

Asked if he had confidence in Morgan McSweeney, the PM’s chief of staff (who has been blamed by some for the briefings), Streeting replied: “Of course I do.”

Pippa Crerar, the Guardian’s political editor, says that a combination of better-than-expected fiscal forecasts, and internal opposition – at cabinet level (see 9.59am), not just in the PLP – persuaded Rachel Reeves to drop the plan to raise the basic rate of income tax.

But Reeves may compensate by dragging more people into higher rates of tax, Pippa says.

We’re also hearing that the OBR’s fiscal forecasts are better than expected, as result of stronger wage growth and therefore higher tax receipts.

It means Rachel Reeves doesn’t need to put up basic rate of income tax to fill lower than expected fiscal gap: the politics of that were proving just too hard with disagreement w/in cabinet and anxiety among Labour MPs over manifesto breach.

But - not least because she wants bigger than before headroom to protect against future risks - we’re still expecting chancellor to fill the gap through taxes.

We were already expecting threshold freezes but now reducing thresholds for 40p and 45p rates also an option. Would drag more people into paying higher rates, esp given wage growth. Salary sacrifice schemes also likely to be hit.

Ministers will hope that this will be seen as a fudge of manifesto promise - rather than blatant breach which would have made them first government in 50 years to hike basic rate of income tax.

Cutting the thresholds for the higher and additional rates of income tax would not be an easy political choice for the chancellor. (See 8.57am.) Rightwing papers in particular regularly complain about “fiscal drag”, the process whereby not raising thresholds in line with inflation pulls more people into higher tax brackets. This has affected millions of people because thresholds have been frozen for much of this decade. (In Australia the process is called “bracket creep”, which is more distinctive.) Cutting thresholds would be like fiscal drag on steroids.

Updated

'I'm not in favour of breaking manifesto pledges' - Streeting suggests Reeves right to ditch budget plan to raise income tax

When Wes Streeting did a media round on Wednesday morning, after No 10 briefing that implicitly accused him of plotting against Keir Starmer, he was mostly supportive of Starmer and the government. But he included some criticism, including a subtle hint than he thought breaking the manifesto promise on income tax would be a mistake.

This morning he has said it out loud. This is what he told listeners during his LBC phone-in this morning when asked about the budget U-turn story.

I’m not in favour of breaking manifesto pledges. I think that trust in politics and politicians is low and it’s part of our responsibility to not only rebuild our economy and rebuild our public services, but to rebuild trust in politics itself.

The fact that the chancellor – and we’re going on speculation here – but the fact that the chancellor was reported as even considering breaking manifesto commitments tells you two things: Firstly, the public finances are under real pressure, and secondly she is fundamentally, unequivocally, committed to her fiscal rules and so therefore she’s got some invidious choices to make, and she’s weighing those up.

I’ve not spoken to the chancellor overnight. I’ve seen the reports this morning that she’s no longer planning to increase income tax.

I think what the news overnight has shown is that people speculate on the budget but ultimately you don’t know what’s in it until the day it’s delivered, and that includes the cabinet, by the way. So we will all have to wait and see.

On this issue, on Wednesday, Streeting certainly gave the impression of being ahead of the curve. That may be one reason why has ended the week as the clear favourite in the betting markets to replace Keir Starmer as Labour leader.

Luke Tryl, the More in Common pollster, says on Bluesky he can understand why Rachel Reeves thought twice before breaking Labour’s manifesto promise on tax.

Too much analysis was still treating breaking the tax pledge as “just another unpopular decision” rather than recognising consequence of breaking a promise which defined an election for the public. If is correct the govt won’t now break it they may have avoided a deeply scarring loss of public trust

This is not about tax (I remain convinced Labour could have pledged to reverse hunts NI rises and still won comfortably). But breaking a pledge which was so central to labours offer at a time when trust already fragile, and the public won’t buy circs have changed (this isn’t like the pandemic).

While Alex Wickham from Bloomberg reports that a better-than-expected fiscal forecast has allowed Rachel Reeves to drop the plan to raise income tax in the budget (see 9.03am), other explanations are also being offered. This is from an analysis from Beth Rigby, Sky News’s political editor.

I understand Downing Street has backed down amid fears about the backlash from disgruntled MPs and voters.

This is from Helen Miller, director of the Institute for Fiscal Studies thinktank, on the market reaction to the chancellor’s reported budget U-turn.

Investors will have 2 broad concerns about news that Chancellor won’t increase income tax rates

1. Does it signal less willingness to do politically difficult things

2. Will alternative tax increase be more damaging to growth

Yes to either will push up on govt borrowing costs

UK government borrowing costs still up after budget U-turn report, but initial spike has eased

Speculation the chancellor has scrapped plans to raise income tax sparked a sell-off in UK government bonds amid fears over unfunded spending pledges, PA Media reports. PA says:

Britain’s long-term borrowing costs were sent soaring as reports suggested the latest U-turn would leave Rachel Reeves scrambling to fill a gaping black hole in the nation’s finances just two weeks before the 26 November budget.

Yields on 30-year UK government bonds, also known as gilts, jumped as much as 14 basis points in early trading, and the yield on 10-year gilts also shot up 12 basis points – rising the most since July.

The yield moves counter to the price of bonds, meaning that prices fall when yields rise.

Yields later eased back a little, with 30-year gilt yields standing seven basis points higher at 5.3% and 10-year gilt yields up six basis points at 4.5%.

Sterling initially fell on the political concerns swirling around the budget, falling 0.3% against the US dollar and euro, before later regaining its poise to remain largely flat at 1.32 US dollars and 1.13 euros.

Kalyeena Makortoff has more on this on our business live blog.

These are from Ben Zaranko, an economist at the Institute for Fiscal Studies, on the chancellor’s U-turn, and in particular on the FT’s claim that, instead of putting up income tax, she will “rely heavily on what has been dubbed the ‘smorgasbord’ approach of increasing a range of narrowly-drawn taxes”.

Considerable risks with this approach: 1) revenues more uncertain; 2) greater risk of damaging economic impacts; 3) lots of angry interest groups, makes U-turns more likely; 4) viewed less favourably by bond market investors, many of whom were expecting an income tax rise.

But on the flip side, it could allow a Budget that doesn’t strictly break manifesto promises (which isn’t a trivial concern given low trust in politicians). It is possible to raise tens of billions without raising rates of the big 3 taxes. It’s just really, really difficult.

Here’s an extraordinarily cynical take: did the government talk up the likelihood of a manifesto-breaking income tax rise in the knowledge that it would push down gilt yields in the window the OBR will use for its forecasts?

This is from Kevin Schofield from HuffPost UK this morning.

Senior Labour source: “Keir and Rachel - in office, but not power.”

This morning a Treasury spokesperson issued this statement in response to the reports that Rachel Reeves has abandoned plans to raise income tax in the budget.

We do not comment on speculation around changes to tax outside of fiscal events. The chancellor will deliver a budget that takes the fair choices to build strong foundations to secure Britain’s future.

Alex Wickham from Bloomberg is reporting that Rachel Reeves dropped her plan to raise income tax in the budget after the fiscal forecast improved. He says:

Rachel Reeves received an improved fiscal forecast from her budget watchdog putting the fiscal hole at £20 billion, leading her to drop plans to raise income tax rates, people familiar with the matter said.

The latest update from the Office for Budget Responsibility moved in a significantly better direction due to the strength of receipts and stronger wage performance.

As well as filling the £20 billion gap, Reeves is still expected to deliver headroom against her fiscal rules of between £15 billion and £20 billion.

An expected productivity downgrade from the OBR has been partially countered, the people said.

Wickham also says, on the basis of what he has been briefed, that Reeves “will likely lower income tax thresholds at the budget [see 8.57am] and raise significant taxes from salary sacrifice schemes”.

The Treasury has now triggered speculation that, to compensate for not rising the basic rate of income tax, it will have to bring down the threshold at which people start paying higher rates.

In its story the Financial Times says:

The chancellor is now exploring alternative ways to fill a fiscal hole estimated by economists to be up to £30bn.

One option to raise revenue would involve cutting the thresholds at which people pay different rates of income tax, while leaving the headline basic and higher rates of the tax unchanged.

Reeves was pictured leaving Downing Street earlier this month with her diary on display, with a single word written in relation to a meeting: “Thresholds.”

Rachel Reeves and Keir Starmer were nervous about putting up the main rate of income tax because that would have been a direct breach of the Labour manifesto, which said:

Labour will not increase taxes on working people, which is why we will not increase national insurance, the basic, higher, or additional rates of income tax, or VAT.

But Labour has already increased employer national insurance, which was seen by many as a breach of this pledge. Reeves is expected to extend the freeze in income tax thresholds and this would increase the amount of income tax people pay, although technically it would not be a breach of the manifesto if the manifesto is understood as referring just to headline rates.

Bringing down thresholds would also be seen as a breach of the spirit of the manifesto, if not the letter of it.

SNP says Labour acting like it's 'completely lost control' and Starmer on his way out

Stephen Flynn, the SNP leader at Westminster, says the latest news about the budget shows the government is in chaos. In a statement this morning, he said:

This isn’t government, this is chaos.

Labour give the impression of a party that has completely lost control - playing a dangerous game with people’s finances so that their prime minister can try to cling to power.

But everyone now knows the clock is ticking until he is dumped from Downing Street. His last act should not be to play fast and loose with the public finances - they’ve already more than paid the price for the constant chaos and crisis that passes for politics at Westminster.

Lib Dems welcome reported 'screeching U-turn' on income tax, and urge Reeves to tax banks more

This is from Daisy Cooper, the Liberal Democrat Treasury spokesperson and deputy leader, on the reported budget income tax U-turn.

If true, this 11th hour screeching u-turn might just spare struggling families from yet another punch in the stomach Budget.

The Chancellor should look at our plan for a windfall tax on the big banks’ billions in profits and put £270 back into people’s pockets.

Reeves accused of ‘rattling the markets’ after income tax U-turn pushes up borrowing costs

Good morning. On Monday last week Rachel Reeves, the chancellor, gave a speech that implied it was all but certain she would break a manifesto promise and raise the main rate of income tax in the budget. Government officials made no attempt to challenge this idea, and some briefings said the decision was “nailed on”.

Only it wasn’t. There has been a U-turn. The news was broken by the Financial Times last night, in a story saying Reeves and Keir Starmer have have “ditched their manifesto-busting plan to increase income tax rates, in a dramatic U-turn ahead of the budget”. The Guardian was soon able to confirm the story and here is our report by Jessica Elgot, Pippa Crerar and Peter Walker.

As the story explains, a U-turn on this scale may be hard to explain.

Downing Street and the Treasury have been preparing the ground for weeks with Labour MPs for a breach of the manifesto. In particular, it has been stressed to Labour MPs that they should not speak out against the budget because of the effect any potential measures might have on the bond markets and the UK’s borrowing costs.

That message to MPs is likely to ring hollow if the chancellor has U-turned after days of internal warfare over a potential challenge to the prime minister’s leadership and the spotlight on briefings against the health secretary, Wes Streeting.

This is all happening less than a fortnight before the budget, which is taking place on Wednesday 26 November.

Here are the main developments on this story this morning.

  • Lisa Nandy, the culture secretary, has not denied the FT scoop. But, in an interview on Sky News, she rejected suggestions that the reported U-turn made the government look chaotic.

  • Kemi Badenoch, the Conservative leader, has welcomed the reports saying the proposed rise in income tax has been ditched. On social media, commenting on a link to the FT story, she said:

Good. (If true).

Only the Conservatives have fought Labour off their tax-raising plans. But one retreat doesn’t fix a Budget built on broken promises. Reeves must guarantee no new taxes on work, businesses, homes or pensions -and she should go further by abolishing stamp duty.

  • UK government borrowing costs are rising this morning in response to the FT report. In our business live blog Kalyeena Makortoff says:

We’re getting some market moves as investors digest Rachel Reeves’ change in plans on income tax ahead of the autumn budget.

In the bond market, the yield on the UK’s 30-year gilt is up 12 basis points, suggesting there is a perception of growing risk to the fiscal position.

The yield on the 20-year gilt, meanwhile, was sitting at 5.225%, also up 12 basis points on the day

Reuters says this is putting long-dated gilts on track for their worst day since July 2, when a Reeves’ tearful appearance in parliament spooked investors.

This is from Faisal Islam, the BBC’s economics editor.

Kalyeena has more on this here.

  • And, in response, the Conservative have accused Reeves of “rattling the markets”. This is from Kevin Hollinrake, the Tory chair.

What Rachel Reeves fails to grasp is that this constant ‘will she, won’t she’ briefing is rattling the markets and undermining business confidence.

It’s bad for growth, bad for investment and bad for jobs.

The country is paying the price for her indecision.

Here is the agenda for the day.

9am: Wes Streeting, the health secretary, takes part in an LBC phone-in.

10am: Peers start the committee stage debate of the assisted dying bill.

11.30am: Downing Street holds a lobby briefing.

Morning: Kemi Badenoch is on a visit in Essex.

If you want to contact me, please post a message below the line when comments are open (normally between 10am and 3pm at the moment), or message me on social media. I can’t read all the messages BTL, but if you put “Andrew” in a message aimed at me, I am more likely to see it because I search for posts containing that word.

If you want to flag something up urgently, it is best to use social media. You can reach me on Bluesky at @andrewsparrowgdn.bsky.social. The Guardian has given up posting from its official accounts on X, but individual Guardian journalists are there, I still have my account, and if you message me there at @AndrewSparrow, I will see it and respond if necessary.

I find it very helpful when readers point out mistakes, even minor typos. No error is too small to correct. And I find your questions very interesting too. I can’t promise to reply to them all, but I will try to reply to as many as I can, either BTL or sometimes in the blog.

Updated

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