Labour descended into fresh turmoil after a Budget U-turn over planned income tax rises sparked market turmoil and a war of words between Downing Street and MPs.
Government officials insisted that Sir Keir Starmer and Rachel Reeves remain committed to controlling the public finances despite ditching a heavily suggested proposal to increase the rate of income tax, which would have broken a key manifesto pledge.
And insiders said that ministers were still prepared to confront Labour MPs with unpopular measures – dismissing claims that the Chancellor had caved to backbench discontent.
But after a day of uncertainty at Westminster and in financial markets, both investors and MPs expressed concern about the contents of the Budget which is still nearly two weeks away.
Minister calls tax U-turn a ‘f**king joke’
Labour MPs said they were dismayed at how the run-up to the Budget had been managed. A minister who had backed raising income tax said that the U-turn was a “f***ing joke”. Asked whether they thought there was logic in the decision, they said: “No.”
Another MP who was also sympathetic to the proposed increase said they were “shocked”, adding: “In the last month, No 10 and No 11 have been rolling the pitch for this and now seem to have changed course. It doesn’t inspire confidence.”
The Chancellor had repeatedly hinted that she was planning to raise the rate of income tax – which would be a breach of the Labour election manifesto – in order to fill a hole in the public finances thought to be around £30bn, caused by weaker projections of future economic growth.
She changed her mind after receiving updated figures from the Office for Budget Responsibility (OBR) which showed the shortfall was smaller than expected, The i Paper understands – driven partly by strong growth in wages, and partly by a reduction in borrowing costs over the course of the autumn.
MPs ‘need to realise they are driving up bond yields’
Sir Jeremy Hunt, the previous chancellor under the Tories, told Times Radio: “Because inflation is a bit higher than forecast, it looks like salaries are going to be a bit higher than forecast and therefore tax receipts a bit higher than forecast. And that can make a very big difference to your receipts in three or four years’ time.”
The Prime Minister’s official spokesman said: “We don’t comment on speculation around tax or changes to tax outside of fiscal events. The Chancellor has been clear on the need to deliver stability in the public finances.”
Government officials denied that they had caved to the anger of backbenchers and said they were still prepared to implement measures which will be unpopular with the parliamentary Labour party – despite a previous rebellion against cuts to welfare.
A source said: “The PLP need to realise that it is their actions which are driving up bond yields. I don’t think they understand that.”
A Downing Street insider added: “Don’t underestimate how much the welfare vote spooked the markets… The markets need to see us doing things that Labour MPs don’t like.” They said a large Commons majority in favour of the Budget would help reassure investors.
Warning of ‘comms fiasco’ impact on economy
Andrew Goodwin of Oxford Economics warned in a note to clients that “a week of Government communications fiascos” had sent UK borrowing costs climbing – with a hit to share prices and the value of the pound.
He said investors were worried that “the Government lacks the appetite to take tough fiscal decisions” and suggested that if ministers could not prove they are balancing the books, there is a danger of a markets meltdown which could crash the currency and bond market, leading to higher interest rates in future.
Hal Cook of investment firm Hargreaves Lansdown said: “Investors have been worried about the UK’s deficit for some time.”
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Ruth Curtice of the left-leaning Resolution Foundation think-tank suggested that the confusion should lead to an overhaul of how the Budget and the economic forecasts from the OBR are produced, adding: “The market moves this morning and in recent weeks suggest a serious look should be taken at the approach to market-sensitive forecast information.”
And Helen Miller of the Institute for Fiscal Studies said investors would “worry that the change of plans signals that this Government are reluctant to do politically difficult things”, warning: “These are the kinds of concerns that can lead investors to demand higher returns when lending to the Government.”
Opposition MPs hit out at Labour’s handling of the Budget, which takes place on 26 November. Conservative leader Kemi Badenoch said that the Chancellor “needs to abandon all plans to raise taxes”. Sarah Olney, the Liberal Democrats’ economic spokesman, said that Reeves should “come clean on what on earth is going on at the Treasury”.
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