Sir Keir Starmer and Rachel Reeves have reportedly “ripped up” proposals to break Labour’s manifesto pledge and raise income tax at this month’s Budget, amid fears of a backlash.
The Chancellor had been expected to hike income tax to make up for a shortfall in the public finances, and said on Monday keeping that promise would come at the price of “deep cuts” to public investment.
But the Financial Times, citing officials briefed on the move, reported that Reeves has now abandoned those plans over concerns they could anger both voters and backbench Labour MPs.
The paper said she is now exploring alternative ways to raise revenue to fill a fiscal hole estimated at up to £30bn.
It said the decision was communicated to the Office for Budget Responsibility on Wednesday, when the Chancellor submitted a list of “major measures” to be included in her Budget on 26 November.
An income tax rise would help her bridge a fiscal black hole, but it would also break Labour’s clear manifesto pledge not to raise income tax, national insurance or VAT.
Reeves needs to fill a gap in the nation’s finances in order keep within her ‘iron clad’ fiscal rules that borrowing should not be paying for day-to-day spending by the end of this Parliament.
The prospect of a manifesto breach drew criticism earlier this month from senior party figures including Labour’s new deputy leader Lucy Powell, who said it would damage “trust in politics”.
The Chancellor, who has already vowed not to return to “austerity” through deeper spending cuts, could now have to rely on increases in a wider range of smaller taxes if she is to stick to her self-imposed rules on debt and borrowing.
The FT suggested that one option would also be to reduce income tax thresholds while keeping tax rates the same, which could raise billions of pounds for the Treasury.
Reeves began November with a speech in which she failed to rule out an income tax hike, having previously said that Labour would stick to its manifesto commitments.
On Monday the Chancellor told Matt Chorley on BBC Radio Five Live: “It would, of course, be possible to stick with the manifesto commitments, but that would require things like deep cuts in capital spending.
“And the reason why our productivity and our growth has been so poor these last few years is because governments have always taken the easy option to cut investment in rail and road projects, in energy projects, in digital infrastructure, and as a result, we’ve never managed to get our productivity back to where it was before the [2008] financial crisis.”
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