Sir Keir Starmer has refused to rule out a freeze on income tax thresholds in next week’s Budget, as Labour struggles to fill a multibillion-pound black hole in the nation’s finances.
As the government scrambles to find the money from other sources, the prime minister did not rule out forcing many to pay more by continuing to freeze the point at which a higher rate kicks in – the so-called fiscal drag.
Leading economists warned the move, which could see the government accused of breaking manifesto promises, risked causing more problems as it “may not calm markets”.
The refusal to rule out a freeze comes after the chancellor, Rachel Reeves, last week U-turned on plans for a broader increase in income tax, which spooked the markets.
Ms Reeves has been warned that a combination of higher borrowing, sluggish economic growth and Labour U-turns means she must raise taxes or tear up her flagship borrowing rules in the Budget.
Sir Keir was tackled on the tax thresholds at Prime Minister’s Questions by Tory leader Kemi Badenoch, who said continuing to freeze them would be a breach of Labour's manifesto.
She asked him: “This is the first Budget to unravel before it’s even been delivered. The chancellor’s cluelessness, I’m afraid, is damaging the economy now. The prime minister needs to end this shambles. So, can he confirm today that he won’t break another promise by freezing income tax thresholds?”
Responding, Sir Keir said: “The Budget is one week today and we will lay out our plans then.”
The Tory leader hit out, accusing the government of Budget chaos, which she said was “causing real anxiety. People aren’t buying houses, businesses aren’t hiring, and they are cancelling investment decisions.”
Afterwards, a Conservative Party spokesperson said: “The prime minister repeatedly failed to repeat the promise made by the chancellor in her Budget last year to end the freeze on income tax thresholds.
“Rachel Reeves said any freeze in thresholds would be a breach of the Labour manifesto and would ‘hurt working people’. If she doesn’t end the freeze at the Budget next week, it will be yet another broken promise from a government that has lost the trust of the British people.”
Stephen Millard, the deputy director for macroeconomics at the National Institute of Economic and Social Research, told The Independent that the positives of such a move would include that it “raises revenue, though later on in the parliament rather than now, and widens the tax base, negating, to a degree, the need for a rise in the basic rate”.
However, he said any freeze could break the party’s manifesto pledge and hit middle-income households, which will be more likely to have to pay tax at the higher rate in the future.
“And it may not calm markets, given it’s a promise about future taxes, which could always be gone back on, rather than a rise in taxes today,” he warned.
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