Rachel Reeves Faces a Credibility Crisis Amid Budget U-Turn
Rachel Reeves, the UK Chancellor, is currently navigating a significant credibility crisis after making a dramatic U-turn on her plan to hike income tax in the Budget. This sudden reversal has sent shockwaves through financial markets, which have begun to price in increased risk for UK government borrowing. The move came despite weeks of strong signals and tough rhetoric from the Chancellor, leading to growing concerns that further attempts to “whack” businesses or extract more money from the wealthy could destabilize confidence and lead to even more severe issues.
The U-turn followed an open revolt within the Labour Party against breaking the election manifesto, with No 10 expressing panic over the potential threat to Keir Starmer’s leadership. Government sources claimed the change was due to slightly less bleak forecasts from the Office for Budget Responsibility (OBR), which showed stronger wage revenues partially offsetting a decline in productivity, resulting in a £20 billion deterioration. However, the Institute for Fiscal Studies (IFS) suggested that Ms. Reeves may have exaggerated the need for the income tax increase to temporarily lower gilt yields, improving the backdrop for her Budget.
Despite this, Ms. Reeves still needs to close a fiscal gap of up to £40 billion by November 26, as she has committed to rebuilding “headroom” lost due to the abandonment of policies like benefits cuts. Economists are alarmed that she might resort to a “Smorgasbord” of smaller tax increases, including a new gambling levy, higher taxes on expensive properties, and per-mile charges for electric vehicles. Extending the hated “stealth raid” freeze on tax thresholds for another two years could also raise billions by dragging millions into higher tax brackets.
Labour insiders are frustrated with the chaotic briefing process ahead of the critical Budget package, with blame being directed at Treasury minister Torsten Bell and No 10 chief of staff Morgan McSweeney. Interest rates on gilts, the main way the government borrows money, spiked in early trading. They fell slightly after the Treasury issued a statement emphasizing the Chancellor’s commitment to stabilizing public finances, only to rise again toward the end of the day.
Analysts warned that the UK could be facing a “credibility shock” due to the infighting and public contradictions. Even Labour’s favored think-tank described the situation as “not normal.” Ms. Reeves’ shift in approach appears to coincide with panic in Downing Street over the threat to Sir Keir.
Only last week, the Chancellor delivered a highly unusual pre-Budget speech warning that “everyone” would have to “contribute” to shoring up the government’s finances. She then stated publicly that cutting capital spending would be the only way to abide by the manifesto promises. That was widely seen as confirmation of broad-based tax increases.
Nigel Green, CEO of global financial advisory deVere Group, warned that “mixed signals” were spooking the markets. He said, “This is exactly how credibility shocks begin. Gilts are sliding, borrowing costs are climbing, and sterling is weakening because markets fear the government is improvising.”
The Resolution Foundation, often favored by Labour ministers, warned that the briefing risked damaging the country. Chief executive Ruth Curtice said, “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.”
Economist and crossbench peer Lord Jim O’Neill told BBC Radio 4’s World at One: “I’m a bit surprised and confused… It is pretty hard to escape the conclusion that the change of mindset is being done because of the divisions inside the Labour Party.”
One despairing government official told the Daily Mail of the turbulent Treasury process: “Ironic that this is the one where they introduced the idea of a Budget Board with Torsten in the chair to make the whole thing more orderly and consultative.”
Ben Zaranko, an economist with the IFS think-tank, said: “Here’s an extraordinarily cynical take: did the government talk up the likelihood of a manifesto-breaking income tax rise in the knowledge that it would push down gilt yields in the window the OBR will use for its forecasts?”
Left-wing MPs have hailed the abandonment of the income tax hike and renewed calls for a “wealth tax.” Appearing on LBC Radio this morning, Mr. Streeting also welcomed the U-turn. “I’m not in favour of breaking manifesto pledges,” he said.
The Cabinet is said to be deeply divided on what to do, with Ms. Reeves having written two Budgets—one openly breaking the manifesto and another skirting around it. A Treasury spokesman said: “We do not comment on speculation around changes to tax outside of fiscal events. The Chancellor will deliver a Budget that takes the fair choices to build strong foundations to secure Britain’s future.”
Julian Jessop of the IEA think-tank has estimated that significant reductions in tax thresholds would be needed to raise the same amount as a 1p increase in the basic rate of tax—£8 billion. The threshold for the higher rate could have to fall from £50,270 to about £46,000, and the top rate from £125,000 to £100,000.
Tory leader Kemi Badenoch said Ms. Reeves “needs to abandon all plans to raise taxes.” Speaking on a visit to a generator hire firm in Writtle in Essex, Ms. Badenoch said: “The problems we are having now were caused by her last budget. The last disastrous budget is creating a need for the new problems that she wants to create.”
Earlier this month, Ms. Reeves was pictured leaving Downing Street with part of her diary visible, and the word “Thresholds” to describe one meeting. There was already a widespread expectation that the Chancellor would extend the long-running freeze on personal tax thresholds, introduced under the Tories. Economists have warned that the number of those paying the 40p tax rate will top 10 million if that happens.
