Rachel Reeves has decided against raising income tax rates at the Budget after receiving better-than-expected economic forecasts, government sources have said.
In recent weeks, the chancellor had given strong indications she would increase the tax – a move that would have broken Labour’s election promise not to raise “the basic, higher or additional rates of income tax”. However, as first reported in the Financial Times, external, the chancellor has decided not to proceed following estimates suggesting a gap in the public finances is £10bn smaller than previously thought.

Instead of raising rates, Reeves could opt to freeze or lower income tax thresholds, the salary levels at which the rates kick in.
Other taxes could also be raised and government sources maintain they are still having to make what they call “tough choices”.
They also stress that the move was not related to the turbulence in recent days relating to the prime minister’s future.
Ahead of every Budget, the chancellor submits their plans to the Office for Budget Responsibility (OBR), which then make forecasts on whether the government will spend more money than it raises and whether the economy will grow or shrink.

A proposal to increase income tax rates by 2p, while cutting National Insurance by the same amount, was sent to the OBR as an option earlier this month to be costed, to help fill what was then a £30bn gap in the public finances, mainly caused by a downgrade to productivity.
Newer assessments from the OBR appear to have increased the projected strength of wages and tax receipts in the coming years and offset several billion pounds of that gap, taking it closer to £20bn. In addition to the more positive forecasts, it is also the case that many Labour MPs were nervous about breaking an election promise, something that would have influenced the chancellor’s decision. Government borrowing costs initially rose in reaction to the reports but fell back after further reports that the financial hole would not be as big as first thought.

Read More: Reeves backs away from income tax rates rise after improved economic forecasts