Rachel Reeves plans £7.5bn tax rise in budget after U-turn on income tax rates

4 hours ago7 min read2 comments

In a decisive fiscal maneuver that sent immediate ripples through the gilt market, Chancellor Rachel Reeves has charted a new course to secure £7. 5 billion in revenue, pivoting from a politically treacherous plan to raise income tax rates to a more stealthy, yet equally impactful, strategy of freezing tax thresholds for two years.This U-turn, while allowing the government to technically adhere to its manifesto promise not to increase the headline rate of income tax, effectively delivers a significant tax rise for millions of workers through fiscal drag. As their nominal wages increase with inflation but their tax-free personal allowance remains static, more of their income will be pulled into higher tax brackets, a classic mechanism often favored by chancellors seeking to bolster Treasury coffers without the overt political fallout of a rate hike.The initial market reaction was telling; the abrupt sell-off in UK government bonds following the announcement of the abandoned rate-increase plan underscores the delicate dance between fiscal policy and investor confidence. The bond market, that great barometer of national economic health, clearly signaled its skittishness, forcing borrowing costs upward and presenting an immediate challenge for a government keen on funding its ambitious public investment agenda.This episode is a stark reminder that for any administration, whether Labour or Conservative, the shadow of the 2022 Liz Truss mini-budget looms large, a cautionary tale of how quickly market sentiment can unravel even the most ideologically pure of economic plans. Reeves, a former Bank of England economist, is undoubtedly aware of this precarious balance.Her current path mirrors the very playbook run by her Conservative predecessor, Rishi Sunak, who extensively used threshold freezes to raise revenue, suggesting that when faced with the cold, hard math of governing, political adversaries often converge on similar, if unpopular, solutions. The £7.5 billion figure now becomes the central character in the upcoming budget narrative—a number that will be scrutinized, debated, and ultimately felt in the pay packets of workers across the country. It raises profound questions about the long-term trajectory of the UK's tax burden, which is already hovering near a post-war high, and the trade-offs between fiscal sustainability and household disposable income.Analysts will be watching closely to see how this move interacts with other economic levers, from interest rates set by the independent Bank of England to global energy prices, in shaping the nation's economic destiny. For the average citizen, the abstract concept of a 'frozen threshold' will soon translate into tangible financial pressure, a subtle squeeze that lacks the dramatic headline of a tax rate increase but carries an equivalent, if not more insidious, weight over time. This is the new reality of British economic policy: a high-wire act performed over the volatile pit of the bond markets, where political promises are tested against economic imperatives, and the true cost of governance is quietly passed on to the taxpayer.

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#Rachel Reeves

#UK budget

#tax thresholds

#bond market

#fiscal policy

#income tax

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