Chancellor Rachel Reeves has opted not to proceed with a proposal to raise income tax rates in the upcoming Budget, a decision that addresses speculation surrounding potential manifesto breaches. The initial plan aimed to increase income tax by 2p while reducing National Insurance by the same amount, intending to generate additional revenue to address a £30 billion shortfall in public finances primarily linked to a productivity downgrade. This strategy, known as the “2 up, 2 down” plan, was modeled after research from the Resolution Foundation and was projected to significantly impact non-wage income sources.
Recent assessments from the Office for Budget Responsibility (OBR) have indicated improved expectations for wage growth and tax revenues, reducing the projected financial gap to approximately £20 billion. Consequently, the income tax increase proposal was not included in the latest measures submitted for OBR analysis.
Despite earlier indications from Reeves suggesting a tax rate increase, Health Secretary Wes Streeting emphasized the importance of maintaining election promises. He noted that the discussions around income tax reflect ongoing challenges in public financing and reaffirmed the chancellor’s commitment to fiscal discipline. This comes amidst discussions about broader leadership dynamics within the government.
Market reactions have been mixed, with reports of increased borrowing costs for the government following the announcement of the canceled tax increase, indicating some market unease. Insiders have suggested that the chancellor’s overall strategy remains focused on enhancing fiscal “headroom” to accommodate cost-of-living pressures and make balanced tax decisions. However, there are unresolved questions about potential tax reforms and their implications for economic stability.
As the final decisions for the Budget have yet to be made, political leaders are working towards a smoother process ahead of the anticipated Budget speech on November 26.
Source: https://www.bbc.com/news/articles/cx2yzj6619wo?at_medium=RSS&at_campaign=rss