When news broke on Thursday night that the UK government would U-turn on its plan to raise income tax at the budget, one of Keir Starmer’s oldest allies thought the game was up.
“It’s over,” the person despaired, as taxpayers and government officials alike tried to make sense of the extraordinary reversal.
Another of the prime minister’s longest-standing supporters echoed that disbelief in a message sent close to 1am describing the change as “mad” after the government spent weeks preparing the public for the opposite. A third ally who’d previously believed Starmer could turn his ailing premiership around said that now, for the first time, they had doubts, according to a report in Bloomberg.
Shortly after markets opened the next morning, Bloomberg reported that the decision not to go ahead with a planned hike to income-tax rates was made after Chancellor of the Exchequer Rachel Reeves received a fiscal forecast that was far better than she’d been expecting.
The gap in the public finances now stood at £20 billion ($26n) rather than the £35bn long feared, meaning Reeves could afford to uphold Labour’s promise not to raise income tax.
Markets whipsawed. First they sold UK assets off the back of the apparent change in Reeves’ plans, then pared some of the losses on news of the improved fiscal outlook, before sliding again when Bloomberg revealed she wouldn’t raise revenue by lowering income-tax thresholds either.
The Treasury is adamant Reeves will stick to her fiscal rules and balance the public finances. What’s not yet clear is how.
Although investors favour balanced books it’s not that the abandoned plans had any fervent constituency in UK politics – except perhaps at the Bank of England, which welcomes anything that would help bring down inflation, even at the expense of making consumers poorer.
To raise taxes and violate promises Labour had made both before and after the election would have been fraught with peril. Instead, what’s worrying Starmer’s allies is how sharply they’ve lost control of the narrative. Pollsters YouGov said that only 12 per cent of Britons think the government has handled the budget well so far.
“I’m at a loss for words. I don’t know what to believe anymore,” Anna Leach, chief economist at the Institute of Directors, said in an interview.
“Constant speculation and policy shifts without a long-term strategy only add to the uncertainty,” said CBI Chief Economist Louise Hellem. “Businesses don’t invest when the rules keep changing,”
The wild swings echo the chaos unfolding inside Downing Street that has left Labour ministers, legislators and aides openly speculating that the Starmer-Reeves project is headed for collapse.
Alongside the more favourable fiscal outlook there was another crucial factor in the income-tax U-turn: politics. The prime minister and chancellor were simply too weak to go ahead with such a flagrant violation of Labour’s manifesto and could not have survived the backlash that would have followed, a senior member of the government said.
Tax promises were a line no one wanted to be on the wrong side of. Health Secretary Wes Streeting, who’d been accused this week by some in Starmer’s entourage of plotting a leadership coup, was quick to tell broadcasters that he wouldn’t support a manifesto breach.
Some of the earliest and loudest protests had come from Deputy Labour leader Lucy Powell – who just weeks ago won a ballot of MPs on a promise to act as a critical voice.
That Starmer and Reeves had bowed to that pressure showed power no longer resided with them but with the broader Labour Party, a government figure said.
Another voiced concern that markets had calculated Downing Street was now beholden to the competing demands of its cabinet and members of parliament, meaning Starmer and Reeves were vulnerable to further adverse moves in the coming weeks.
They said the main risk now was that investors would no longer see them as able to hold back spending demands from the wider party.
Another joked darkly that they were not in hock to the bond market, as another of Starmer’s would-be challengers, Andy Burnham, had said in September, but in hock to Labour MPs. That sentiment will likely only concern investors further.
A senior government official appealed for calm, insisting that the fundamental strategy behind the budget hadn’t changed. Reeves would announce a balanced fiscal policy on November 26, raising taxes to fill the hole in the finances and giving herself an increased buffer of between £15bn and £20bn against her fiscal rules.
They said the budget would put fiscal stability first while also taking steps both to reduce the cost of living for Britons and boost investment.
After all, the gain from the proposal to raise income tax while cutting national insurance was only £6bn. Reeves had judged that wasn’t enough of a revenue boost to be worth the political pain, a person familiar with her thinking said.
Still, the last-minute change of heart leaves Labour aides and MPs questioning where Starmer and Reeves go next.
One said that the premier was paralysed between three camps: his chief of staff Morgan McSweeney, the Blairite faction within Number 10, and Labour figures on the so-called soft left. Starmer had spent weeks trying to placate all sides, by turns backing a hard-line migration policy, then espousing more liberal sentiments, then expanding welfare payments to satisfy the left.
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