OBR challenges claims Reeves dropped income tax rise due to rosier forecasts

"The Office for Budget Responsibility (OBR) has cast doubt on claims Rachel Reeves dropped plans to raise income tax in this week's budget because of rosier forecasts, pointing out she knew about these well before the change of heart. In a move likely to exacerbate tensions with the Treasury, the OBR chair, Richard Hughes, has taken what he acknowledged was the unusual step of writing to the Treasury select committee to explain how its forecast evolved, given the circumstances in this case."

"Reeves's budget was preceded by a flurry of speculation and briefing, even before the OBR accidentally made its documents available online earlier than intended on Wednesday. The chancellor took the rare step of delivering an early morning scene setter speech, on 4 November. This was widely interpreted as an attempt to clear the way for breaching the letter of Labour's manifesto pledge on income tax by raising rates. Reeves repeatedly refused to deny that she would do so."

"Days later, however, when final policy decisions were being made, Reeves and Keir Starmer decided to ditch that idea a development the Financial Times reported on 13 November. The next morning, as bond markets reacted badly to the news, with yields effectively interest rates on government bonds rising, Treasury sources briefed journalists that the income tax plan was no longer necessary, because of improved OBR forecasts. In particular, these sources suggested, higher than expected inflation and wage growth meant the adjustment needed to meet Reeves's fiscal rules was smaller than expected."

The OBR challenged claims that improved forecasts prompted the abandonment of a planned income tax rise, stating ministers knew about forecast improvements earlier. OBR chair Richard Hughes wrote to the Treasury select committee to explain how forecasts evolved, an unusual step given the circumstances. The budget was preceded by speculation, an accidental early release of OBR documents and an early morning scene setter speech on 4 November. The speech was widely seen as preparing to breach Labour's manifesto pledge on income tax. Reeves initially refused to deny such a rise. After final decisions, Reeves and Keir Starmer scrapped the plan; Treasury briefings linked that change to improved OBR forecasts and stronger inflation and wage growth reducing the needed fiscal adjustment. Hughes's letter included a chart confirming forecasts improved but indicated improvements predated the final decision.

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