Labour eyes tax U-turn; Budget jitters rise

London 

Political tensions intensified in Westminster today as reports surfaced that the Labour government is preparing to abandon plans for an income tax rise in the upcoming Budget, prompting uncertainty across financial markets and renewed debate within the party.

According to senior government sources, Chancellor Rachel Reeves has stepped back from proposals to raise income tax rates after fresh economic forecasts suggested the fiscal shortfall may be smaller than initially feared. The Office for Budget Responsibility’s updated projections, expected alongside the November 26 Budget, reportedly show improved revenue trends giving the government slightly more room to maneuver.

However, the shift has triggered what analysts describe as “Budget jitters.” Gilt yields climbed and the pound weakened earlier this week, as markets reacted to what some investors view as mixed signals from the Treasury. Economists warn that wavering policy direction could undermine fiscal credibility at a time when the government is under pressure to stabilize long-term public finances.

Inside Labour, the U-turn has caused noticeable strain. Officials say Downing Street intervened to halt the tax rise amid concerns it would violate the party’s election pledge not to increase income tax, National Insurance, or VAT. Some MPs had already warned that a tax hike could damage voter trust and inflame party divisions.

But not everyone in Labour is fully aligned. Scottish Labour leader Anas Sarwar declined to rule out higher taxes in Scotland, saying only that the Budget will clarify the government’s long-term direction. Meanwhile, several economists and think tanks insist that targeted tax increases remain “inevitable” if the government hopes to fill its structural fiscal gap.

The Confederation of British Industry echoed that sentiment, urging Reeves to rethink her tax commitments and build more “fiscal headroom” to avoid future instability. Business leaders argue that without a broader revenue strategy, the UK risks falling further behind competing economies.

While the headline income tax rate appears safe for now, Treasury insiders say the government is preparing a series of threshold adjustments and loophole closures that may still increase tax burdens for many households. These measures would technically avoid breaking Labour’s tax pledge while still raising billions in additional revenue.

With the Budget now less than two weeks away, the stakes could hardly be higher. Markets are watching closely, Labour MPs are demanding clarity, and the public is waiting to see how the government plans to balance its promises with economic reality.

For now, Labour’s attempted course correction has only deepened the sense of unease raising questions about whether the U-turn will calm concerns or fuel even greater doubts ahead of a crucial fiscal moment for the government.

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