Our new Chancellor Rachel Reeves has made a damningly brave choice. In a breaking development, Brown announced she would not increase income taxes in her recently unveiled Budget, after months of speculation that she might. This decision comes after weeks of speculation, particularly concerning her “2 up, 2 down” proposal, which was sent to the Office for Budget Responsibility (OBR) for costing earlier this month. The original plan called for a 2 percent increase in income tax brackets. To counteract this, it included a 2p cut in National Insurance for employees.
During that one-month period, Chancellor Reeves was a hands-on responder to engaging in candor, tough fiscal negotiations. He emphasized stabilizing financial markets amid a stormy public finance environment. The government’s own finances are leaking, with a £30 billion hole now set to be filled—largely blamed on a cut to forecast productivity. Unexpected “smoother” economic forecasts made the difference on her decision to keep all tax rates in their current state.
Reeves suggested an income tax increase could appear in the Budget. Her ultimate decision is a testament to her ironclad commitment to her fiscal rules. The bond markets were understandably skittish at first, fretting over speculation regarding her fiscal master plan. They too saw seesawing rates as rosier economic projections provided brief respite before rates shot back up again.
Even Health Secretary Wes Streeting has dropped enough hints to assure us that the government is changing its tune. He warned against losing credibility by breaking their manifesto commitments and breaking election promises.
“It is really important that we keep our promises and we stand by our manifesto. The fact that there’s been speculation about income tax shows how difficult the situation is with public finances and secondly that the chancellor is determined to stick to her fiscal rules.” – Wes Streeting
The Chancellor’s government is just the latest to announce it will stick with a £40 billion a year tax-threshold freeze. This shift will raise an additional £8 billion annually. This freeze is one piece of a larger strategy to close the fiscal gap and do so with as little disruption to taxpayers as possible.
Chancellor Reeves, meanwhile, is preparing for a big speech on November 26. Look for her to provide some detail on her government’s fiscal path and priorities going forward. Her recent budget decisions show a calculated hand, weighing the need for new revenue against the political fallout from raising taxes.
Yet even with this windfall, Reeves is still wary of raising income tax rates. That’s a clear indicator that he gets how tightly tied economic security is to our mood. Her decision is an example of her willingness to chart a course through choppy financial seas while still being answerable to the people she serves.