Treasury not considering cutting thresholds for higher rates of income tax, sources say
This is from Pippa Crerar, the Guardian’s political editor, on where we stand this morning after all the fallout from the budget income tax U-turn. She confirms that sources are now ruling out cutting the thresholds for paying higher rates of income tax.
She says government insiders claim the change is all down to better-than-expected fiscal forecasts, and that Labour opposition to the proposal was not a factor.
Where we are on budget after revelation Rachel Reeves will no longer hike income tax rates
– Treasury confirms that stronger than expected OBR forecasts means fiscal gap is closer to £20bn than previously speculated £30-£40bn. Reeves also wants headroom of around £15bn in addition.
– This means Reeves does not need to become first chancellor in 50 years to raise basic rate on income tax – breaching a central manifesto promise.
– Improved forecasts are result of stronger wage growth (and therefore higher tax receipts) which started to feed into figures last week.
– But £20bn is still big number – so expect income tax thresholds to be frozen for another two years, taxes on salary sacrifice schemes, fuel duty equivalent for electric vehicles – plus ‘smorgasbord’ of other measures.
– As per previous post, I’m told that income tax thresholds will not be cut, despite speculation.
– Govt insiders say decision to drop income tax plan is nothing to do with political fall-out after Reeves publicly signalled manifesto breach – causing huge anxiety among Labour MPs (which ultimately fed into No 10’s extraordinary attempts to shore up PM).
– They defend decision to ‘roll the pitch’ on income tax rises – saying at that point they thought it might be necessary and leaving it to just before budget would’ve spooked MPs and markets.
Key events
Badenoch claims she has never seen ‘this level of chaos' ahead of a budget as Labour showing now
In a statement last night Kemi Badenoch, the Conservative leader, said it was “good” if Rachel Reeves has ruled out putting up income tax. (See 8.40am.)
This morning she said the government was being “completely irresponsible”.
In a clip for broadcasters, asked about the overnight story from the Treasury about income tax not going up, she said:
It’s quite clear that the government doesn’t know what it is doing.
What they have announced today is completely irresponsible, given all of the announcements about all the tax rises they’re going to raise.
It’s very clear that they’re in a mess. They’ve been talking about tax rises on income tax for ages now, weeks and weeks throughout the summer. Now that they’re saying no.
It’s good if they’re not going to increase income taxes. But the truth is they shouldn’t be increasing any taxes at all.
But I’ve never seen a government do this in the run-up to a budget. I have never seen this level of chaos, this level of irresponsibility.
The two statements aren’t completely incompatible – Badenoch’s overall point is that Tories don’t approve of tax rises, and they think the government’s handling of this has been a mess – but you could be forgiven for being confused
Badenoch also said this was a “government in chaos”. She explained:
The day before yesterday, the prime minister had to refer himself to a standards adviser. He’s got three or four members of his cabinet who are being investigated for all sorts of things. You look at what happened the day before yesterday, hearing about a coup. Some cabinet ministers want to overthrow the prime minister. They are not focused on running the economy.
Too much market-sensitive economic forecast information getting out ahead of budget, says thinktank
The Resolution Foundation has expressed concern about the amount pre-budget briefing that has come out this year about the financial forecasts. This is from Ruth Curtice, the thinktank’s chief executive.
At the budget the hancellor needs to do three things: take decisive steps to improve the public finances and increase the financial buffers against her fiscal rules; address cost of living pressures for families and support the Bank of England in lowering inflation; and in the interest of growth make tax changes that improve the system overall.
There is more than one way to skin this particular cat, and we won’t know until we see the whole package whether she has achieved these three objectives.
Much depends on the forecasts from the Office for Budget Responsibility. A significant economic deterioration would leave the chancellor choosing whether to break the spirit or letter of her manifesto pledge on income tax. A more benign economic outlook will make it far easier to avoid breaking it at all.
It is normal for economic forecasts and policies to change in the run up to the budget. It is not normal for so much of that to be laid bare in public. The market moves this morning and in recent weeks suggest a serious look should be taken at the approach to market-sensitive forecast information.
Ed Conway from Sky News was making a similar point earlier. (See 11.38am.)
Treasury not considering cutting thresholds for higher rates of income tax, sources say
This is from Pippa Crerar, the Guardian’s political editor, on where we stand this morning after all the fallout from the budget income tax U-turn. She confirms that sources are now ruling out cutting the thresholds for paying higher rates of income tax.
She says government insiders claim the change is all down to better-than-expected fiscal forecasts, and that Labour opposition to the proposal was not a factor.
Where we are on budget after revelation Rachel Reeves will no longer hike income tax rates
– Treasury confirms that stronger than expected OBR forecasts means fiscal gap is closer to £20bn than previously speculated £30-£40bn. Reeves also wants headroom of around £15bn in addition.
– This means Reeves does not need to become first chancellor in 50 years to raise basic rate on income tax – breaching a central manifesto promise.
– Improved forecasts are result of stronger wage growth (and therefore higher tax receipts) which started to feed into figures last week.
– But £20bn is still big number – so expect income tax thresholds to be frozen for another two years, taxes on salary sacrifice schemes, fuel duty equivalent for electric vehicles – plus ‘smorgasbord’ of other measures.
– As per previous post, I’m told that income tax thresholds will not be cut, despite speculation.
– Govt insiders say decision to drop income tax plan is nothing to do with political fall-out after Reeves publicly signalled manifesto breach – causing huge anxiety among Labour MPs (which ultimately fed into No 10’s extraordinary attempts to shore up PM).
– They defend decision to ‘roll the pitch’ on income tax rises – saying at that point they thought it might be necessary and leaving it to just before budget would’ve spooked MPs and markets.
Here is the clip of Wes Streeting denouncing striking doctors on LBC earlier. See 11.26am for the full quotes.
The Liberal Democrats are urging Rachel Reeves to face the press and explain her plans today. Sarah Olney, the party’s business spokesperson, said:
The chancellor gave a press conference to trail her income tax hikes. She must come before the British public today, unroll that particular pitch and come clean on what on earth is going on at the Treasury.
Ed Conway, Sky News’s economics editor, says a Bloomberg report saying the fiscal forecast is better-than-expected (see 9.03am) led to gilt yields coming down a bit (see 9.31am).
Here is my colleague Kiran Stacey’s take on what we know about the budget.
Some things to bear in mind about these late changes to the budget:
1) Govt sources say the forecasts changed. But the only new thing they learned this week was the OBR’s assessment of their own plans.
Maybe the OBR said their tax rises would raise more than expected?
2) Three major tax-raising measures now at the heart of the budget:
– Freezing tax thresholds – raises an estimated £7.5bn
– Ending salary sacrifice benefits for pensions – £2bn
– Tax on EVs – £2bn
3) We’re now told the black hole needing to be filled is around £20bn. Plus the chancellor wants to increase her headroom.
So where is the rest of the money coming from?
The BBC’s charter review will examine political appointments to the broadcaster’s board, Lisa Nandy has said, as they have “damaged confidence and trust”, Jamie Grierson reports.
Yesterday and this morning some of the political editors were being briefed that Rachel Reeves was considering lowering higher income tax thresholds in the budget (see 8.57am, 9.03am and 10.20am.)
Now other political editors (see here and here, for example) are being told that is not happening.
That suggests that the line has either changed, or been clarified, as the morning has gone on.
The Treasury is not saying any of this on the record. That is normal with a budget. But that does not mean they don’t talk to journalists, and it does not mean don’t think hard about how letting the City know what to expect. It is important that when the budget does get announced, the markets don’t get a nasty shock.
This is from Ed Conway, Sky News’s economics editor, on the market volatility ahead of the budget.
I’ve been reporting on UK Budgets for decades.
So perhaps worth underlining something: this degree of market volatility ahead of a Budget is NOT normal.
Underlines the extent to which UK has been in the bond vigilantes’ crosshairs, since the mini Budget.
This could get v bumpy
Mahmood to unveil anti-migration measures modelled on Danish system
Shabana Mahmood, the home secretary, is due to announce sweeping changes next week aimed at making the UK less attractive for migrants and modelled on the Danish system, Jamie Grierson reports.
Voter would oppose a 1p in the pound rise in the basic rate of income tax by 64% to 25%, YouGov polling suggests.
Streeting says striking doctors ‘extremely irresponsible' in angry exchange with caller on LBC phone-in
Resident doctors in England have started a five-day strike today.
In his LBC phone-in this morning, Wes Streeting, the health secretary, accused the resident doctors of being “extremely irresponsible” in an angry response to a caller, Niraj, from Harrow in north London, who said that he and his colleagues did not want to be on strike, that they cared about patient safety, but that they had been forced to act because the government was not addressing their concerns.
Streeting replied:
On every single one of those fronts, on pay, on specialty training, places, on improvements to conditions, I have been working to address every single one of those issues. These are not the conditions in which people go out on strike.
Strike should be a last resort, and I’m sorry, but when you say ‘I don’t want to be out on strike today’, yes, you do, because you have made that choice.
You have done so having had a 28.9% pay rise, the highest in the public sector, two years in a row, and on those things that you’ve just mentioned, you say they take time.
Yes, they do, because it is complicated.
So, to hold patients to ransom and to be out on strike, setting back the NHS, because you don’t think we’re going fast enough, and because the leadership of your union are not honest enough that some of this change takes time, is extremely irresponsible.
It is extremely unnecessary and the other listeners to this show who have not had a 28.9% pay rise, whose taxes are paying for our National Health Service and who are receiving a substandard service, not least because of the damage that these rounds of industrial action are doing, I think they will be quite shocked, actually, that against the backdrop of a health secretary that wants to work with you, who acknowledges these are challenges and wants to address them, and has given you the biggest pay rise in the public sector two years in a row, I think people will be shocked by the BMA’s reprehensible behaviour.
Don’t tell me you don’t want to be out on strike, because that’s exactly where you are. You made that choice, own it and own the damage it will do to your patients.
UPDATE: See 12.23pm for the clip.
Andrew Fisher, who was head of policy for Jeremy Corbyn when he was Labour leader, has expressed concern about the reports saying Rachel Reeves might use fiscal drag as a way of compensation for not putting up income tax. (See 10.20am.)
The proposal seemed to be raising income tax rates but offsetting with NI cut (as per @resfoundationproposal) to protect low and middle incomes
Now plan seems to be to freeze income tax thresholds which hits lower and middle incomes
Make it make sense!
Also there is nothing remotely honest about pledging not to raise income tax, and then freezing the threshold so that people pay more income tax.
Stealth tax rises are probably more damaging to trust than openly and honestly arguing for clear rises.
Streeting says he and Starmer both ‘extremely frustrated' by this week's No 10 briefings
In his LBC phone-in this morning, Wes Streeting, the health secretary, was asked what happened when Keir Starmer phoned him on Wednesday night. Starmer apologised to Streeting, No 10 said. This happened after No 10 sources were reported as saying that Starmer was getting ready to fight off a leadership challenge, with Streeting being identified as the person most likely to mount such a challenge.
Streeting said he did not want to discuss the call.
But, asked to comment on Starmer’s “tone”, Streeting said it was “as nice as usual”.
Asked if Starmer was “apologetic”, Streeting replied:
To be honest, I think the prime minister and I are both in the same boat here of being extremely frustrated because this is a total distraction. And I just say – the season finale of the of The Traitors is over and it’s time we focused on the news.
Asked if he had confidence in Morgan McSweeney, the PM’s chief of staff (who has been blamed by some for the briefings), Streeting replied: “Of course I do.”
Pippa Crerar, the Guardian’s political editor, says that a combination of better-than-expected fiscal forecasts, and internal opposition – at cabinet level (see 9.59am), not just in the PLP – persuaded Rachel Reeves to drop the plan to raise the basic rate of income tax.
But Reeves may compensate by dragging more people into higher rates of tax, Pippa says.
We’re also hearing that the OBR’s fiscal forecasts are better than expected, as result of stronger wage growth and therefore higher tax receipts.
It means Rachel Reeves doesn’t need to put up basic rate of income tax to fill lower than expected fiscal gap: the politics of that were proving just too hard with disagreement w/in cabinet and anxiety among Labour MPs over manifesto breach.
But – not least because she wants bigger than before headroom to protect against future risks – we’re still expecting chancellor to fill the gap through taxes.
We were already expecting threshold freezes but now reducing thresholds for 40p and 45p rates also an option. Would drag more people into paying higher rates, esp given wage growth. Salary sacrifice schemes also likely to be hit.
Ministers will hope that this will be seen as a fudge of manifesto promise – rather than blatant breach which would have made them first government in 50 years to hike basic rate of income tax.
Cutting the thresholds for the higher and additional rates of income tax would not be an easy political choice for the chancellor. (See 8.57am.) Rightwing papers in particular regularly complain about “fiscal drag”, the process whereby not raising thresholds in line with inflation pulls more people into higher tax brackets. This has affected millions of people because thresholds have been frozen for much of this decade. (In Australia the process is called “bracket creep”, which is more distinctive.) Cutting thresholds would be like fiscal drag on steroids.
‘I'm not in favour of breaking manifesto pledges' – Streeting suggests Reeves right to ditch budget plan to raise income tax
When Wes Streeting did a media round on Wednesday morning, after No 10 briefing that implicitly accused him of plotting against Keir Starmer, he was mostly supportive of Starmer and the government. But he included some criticism, including a subtle hint than he thought breaking the manifesto promise on income tax would be a mistake.
This morning he has said it out loud. This is what he told listeners during his LBC phone-in this morning when asked about the budget U-turn story.
I’m not in favour of breaking manifesto pledges. I think that trust in politics and politicians is low and it’s part of our responsibility to not only rebuild our economy and rebuild our public services, but to rebuild trust in politics itself.
The fact that the chancellor – and we’re going on speculation here – but the fact that the chancellor was reported as even considering breaking manifesto commitments tells you two things: Firstly, the public finances are under real pressure, and secondly she is fundamentally, unequivocally, committed to her fiscal rules and so therefore she’s got some invidious choices to make, and she’s weighing those up.
I’ve not spoken to the chancellor overnight. I’ve seen the reports this morning that she’s no longer planning to increase income tax.
I think what the news overnight has shown is that people speculate on the budget but ultimately you don’t know what’s in it until the day it’s delivered, and that includes the cabinet, by the way. So we will all have to wait and see.
On this issue, on Wednesday, Streeting certainly gave the impression of being ahead of the curve. That may be one reason why has ended the week as the clear favourite in the betting markets to replace Keir Starmer as Labour leader.
Luke Tryl, the More in Common pollster, says on Bluesky he can understand why Rachel Reeves thought twice before breaking Labour’s manifesto promise on tax.
Too much analysis was still treating breaking the tax pledge as “just another unpopular decision” rather than recognising consequence of breaking a promise which defined an election for the public. If is correct the govt won’t now break it they may have avoided a deeply scarring loss of public trust
This is not about tax (I remain convinced Labour could have pledged to reverse hunts NI rises and still won comfortably). But breaking a pledge which was so central to labours offer at a time when trust already fragile, and the public won’t buy circs have changed (this isn’t like the pandemic).
While Alex Wickham from Bloomberg reports that a better-than-expected fiscal forecast has allowed Rachel Reeves to drop the plan to raise income tax in the budget (see 9.03am), other explanations are also being offered. This is from an analysis from Beth Rigby, Sky News’s political editor.
I understand Downing Street has backed down amid fears about the backlash from disgruntled MPs and voters.
