Housing policy ideas bring new risks for buyers and sellers
Bond markets reacted immediately to indications of a tax U-turn, with UK government bond yields rising after reports that Rachel Reeves would no longer pursue income tax increases.
The movement followed concerns over fiscal policy decisions and how they would affect the cost of government borrowing.
Speculation about income tax changes increased before the Budget. Reeves, speaking on BBC Radio 5 Live on November 10, said the government was looking at both taxes and spending to address cost-of-living pressures and reduce national debt. She did not confirm whether income tax rates would rise.
Forecasts from the Office for Budget Responsibility (OBR) have since shown that the outlook had improved during the autumn. In a letter to the Treasury select committee, OBR chair Richard Hughes said the organisation released additional detail to show how its projections evolved.
The OBR chart indicated that in the first forecast round on October 3, the government was £2.5bn short of meeting its first fiscal rule. Addressing that gap would have required an adjustment of £12.5bn to provide £10bn of headroom, or £22.5bn for a £20bn margin, in addition to £7bn linked to U-turns on winter fuel allowance and disability benefit changes.
By the third forecast round delivered on October 31, Reeves was projected to meet the rule with £4.2bn to spare. The OBR stated in its published outlook that “no further adjustments were made to our economy or fiscal forecasts” after that date other than changes reflecting Treasury policy decisions.
The Financial Times reported on November 13 that Reeves and prime minister Keir Starmer had dropped the income tax option. Bloomberg later reported that improved forecasts were cited by unnamed sources for the reversal. Treasury officials maintain decisions were only finalised once the OBR incorporated the impact of Budget measures.
In the Budget, Reeves announced tax rises totalling £26bn over the forecast period, increasing headroom to £21.7bn and funding policy changes including scrapping the two-child limit. The Independent reported that the Treasury was considering revenue through extending the freeze on income tax thresholds and reducing the annual cash ISA limit. The Telegraph reported that officials were examining a council tax revaluation and potential surcharge on higher-value properties.
Shadow chancellor Mel Stride said the public was misled and that Labour considered increasing income tax rates despite improved estimates.
Reeves has previously questioned the timing of the OBR’s productivity forecast revision and its approach to Treasury policy assumptions, such as the government’s reset with the EU and a possible youth mobility scheme. Hughes is set to appear before MPs to discuss the forecasting sequence and the inadvertent early publication of documents.
