British finance minister Rachel Reeves has scrapped plans to raise income tax rates in the budget on November 26, the Financial Times has reported, reversing course for fear of angering already restive lawmakers and voters.
Reeves is expected to need to raise tens of billions of pounds to stay on track for her fiscal targets, and her recent comment that "we will all have to contribute" was seen as paving the way for the government to break its main election pledge and hike income tax rates.
Sterling dipped 0.3% after the report was published, with markets on edge over any suggestion that Reeves will fail to do what is needed to get the public finances back on a solid footing.
In recent weeks investors had taken reassurance from signals from Reeves that she was prepared to take tough measures to remain on course to meet her fiscal targets, contributing to a drop in government bond yields.
Economist Kallum Pickering at Peel Hunt said Reeves would now likely opt for a "haphazard patchwork of smaller anti-growth tax increases".
"That would be a bad outcome," he said. "It would add to uncertainty, further damage the government's already tarnished credibility, and complicate any BoE judgement to potentially offset tax rises with rate cuts."
The FT said one revenue-raising alternative for Reeves was to cut the thresholds at which people pay different rates of income tax.
Paul Johnson, a former director of the Institute of Fiscal Studies think tank, told BBC radio that such a move could raise large amounts of money for the Treasury but would disproportionately hurt lower-paid workers.
The National Institute of Economic and Social Research, a leading think tank, had warned that Reeves needed to embark on major tax rises to avoid a repeat of the loss of market confidence that cost former prime minister Liz Truss her job.
The FT said the decision to change plans, taken this week, was communicated to the Office for Budget Responsibility on Wednesday. It cited people briefed on the revised plans as saying Reeves would instead rely on a "smorgasbord" approach of hiking a range of narrowly-drawn taxes.
Reeves and Prime Minister Keir Starmer said before last year's election that they would not raise taxes for "working people" including income tax, social security contributions and value-added tax.
Earlier this week, Reeves told BBC radio that she could only stick with the manifesto commitments if she made deep cuts in capital spending.
