Chancellor abandons income tax rise after days of briefing warfare and fears of leadership revolt

Rachel Reeves is set to abandon plans to raise income tax in her upcoming budget after an extraordinary week of internal conflict that left Labour MPs stunned and leadership speculation swirling around Westminster. The chancellor who had been preparing MPs for a breach of Labours manifesto pledge has now reversed course with sources saying Keir Starmer and Reeves agreed to scrap the proposal.

The U turn was first reported by the Financial Times and confirmed to the Guardian by a senior source who said the income tax plan had been ditched entirely. The decision arrives after days of chaotic briefings inside the party with allies of Starmer warning that he would fight any leadership challenge. At the same time rumours circulated about the health secretary Wes Streeting with some suggesting he was being lined up as a potential challenger something he publicly denied.

The reversal was sent to the Office for Budget Responsibility on Wednesday. Downing Street would not deny the reports but said it would not comment on budget matters. Until now Reeves had indicated to the watchdog that she planned to raise income tax a move that would break one of Labours most high profile promises to protect working people from higher taxes.

Although the immediate rise appears to have been abandoned Reeves may still examine changes to thresholds which could increase the tax burden indirectly. Treasury sources have stressed repeatedly that Reeves wants significant fiscal headroom to reassure the markets and avoid speculation that she might breach the governments own fiscal rules.

The government now expects to rely on a collection of smaller revenue raising measures to fill what officials have called a multibillion pound hole created by lower productivity forecasts and earlier U turns including changes to winter fuel allowances and disability benefits. Among potential measures under discussion is an increase in gambling levies a policy championed by former prime minister Gordon Brown to help cover the cost of ending the two child benefit cap. Treasury officials however say such levies cannot raise enough money on their own.

The U turn comes only ten days after Reeves held an unexpected Downing Street press conference where she refused to rule out an income tax rise. Her comments at the time were widely interpreted by Labour MPs as a clear signal that higher taxes were coming. She said that as chancellor she had to face the world as it is not the world she wished it to be.

Downing Street and the Treasury had spent weeks preparing Labour MPs for a potential breach of the manifesto stressing the importance of fiscal stability and the risk that critical comments could unsettle the bond markets and raise borrowing costs. Yet that careful messaging has now unravelled following days of internal warfare over Starmers leadership and the wave of briefing directed against Streeting.

Many Labour MPs say the reversal will not erase the sense of chaos that has engulfed the party. In July Labour MPs used their majority to force the government into a damaging retreat on a welfare vote. That moment highlighted the strength of backbench pressure and the limits of Starmers authority. The latest crisis appears to have reopened doubts about the strength of his leadership and the stability of his political operation.

The Treasury had attempted to build support for the income tax plan by hosting round table discussions with ministers and economists. Despite the effort many MPs remained deeply concerned about the impact on their constituents and sceptical about breaking a central manifesto commitment. Discontent with Starmer that had been simmering for months erupted into public view with MPs openly asking whether the tax rise would spell the end of his leadership.

Downing Street responded by briefing that Starmer was prepared to fight any challenge. However that approach backfired when his allies suggested Streeting was planning an imminent coup. The comments shocked MPs and ministers including some inside the cabinet who believed No 10 had exposed the prime minister as vulnerable. Several now think the leadership contest has begun in all but name.

With the income tax plan abandoned Reeves must now rebuild support for her budget while Starmer attempts to regain control of a party shaken by days of turmoil.