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Sir Keir Starmer and Rachel Reeves have ditched their manifesto-busting plan to increase income tax rates, in a dramatic U-turn ahead of the Budget on November 26, according to officials briefed on the move.
The prime minister and chancellor have “ripped up” earlier proposals to raise the basic and higher income tax rates, officials said, amid fears the move would anger voters and further antagonise mutinous Labour MPs.
The decision to change tack, taken this week, was communicated to the Office for Budget Responsibility on Wednesday in a submission of “major measures” set to be announced by Reeves in her Budget.
One person briefed on the proposals said the original Budget tax plan had been ripped up, while a second confirmed the fiscal statement had been rewritten since the first set of measures by Reeves was sent to the UK fiscal watchdog earlier this month.
The chancellor is now exploring alternative ways to fill a fiscal hole estimated by economists at 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 to describe one meeting: “Thresholds.”
Reeves had already been expected to extend a freeze on personal tax thresholds that was introduced by the Conservatives.
Prolonging this freeze by another two years would raise £8bn to £10bn per annum, depending on details in the OBR’s forecasts that will be set out at the Budget.
But cutting the personal tax thresholds would raise billions of pounds more in additional revenue.
Meanwhile people briefed on the revised plans said Reeves would also rely heavily on what has been dubbed the “smorgasbord” approach of increasing a range of narrowly-drawn taxes.
They cautioned the parts of this package could still change, but a new gambling levy and higher taxes on expensive properties are expected to be included.
The Treasury has been approached for comment.
For weeks Reeves had been preparing the ground to break Labour’s election manifesto pledge not to increase the rates of income tax, national insurance or value added tax, with many Labour MPs fearing it would happen.
Downing Street officials insisted the Budget had not been rewritten in response to the leadership crisis that has engulfed Starmer in the last few days, after the prime minister’s allies briefed that he could soon face a coup attempt. Some Labour MPs believe Starmer’s days in Downing Street are numbered.
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The original tax plan pursued by Starmer and Reeves, based on an idea from the Resolution Foundation think-tank, carried heavy political risks for the embattled premier and his chancellor.
It would have involved income tax rates rising by 2p in the pound, albeit with an offsetting 2p cut in national insurance rates.
The “two up, two down” policy would have broken one of Labour’s key manifesto promises, even if it would have left “working people” seeing no impact in their monthly pay slips.
Others would have been hit hard by the policy. It would have raised £6bn from the income of non-workers such as landlords and pensioners, who pay the income tax but not national insurance, according to calculations by the Resolution Foundation.