Director Weekly The Chancellor has U-turned and ruled out an income tax rise, leaving businesses wondering what to expect from the Budget
After a series of hints, leaks, and Rachel Reeves’s own ‘pitch rolling’ speech, it seemed increasingly clear that this month’s Budget would be built around a manifesto-busting rise in income tax. Now, however, that option has been ruled out.
The immediate reason appears to be a better-than-expected assessment by the Office for Budget Responsibility (OBR) of the hole in the public finances. It’s now judged to be £20bn rather than £30 billion – still substantial, but markedly better than anticipated by the Treasury, based on the OBR’s previous downgrade of UK productivity.
The surprise move followed the release of two other significant sets of numbers this week. The first was Tuesday’s labour market data, which indicated that unemployment has hit 5% – the highest level since early 2021. And on Thursday, the latest GDP estimates showed below-forecast growth of just 0.1% over the quarter to September 2025.
Those numbers should be read alongside the new OBR assessment of the fiscal hole. A £20bn gap still requires a sizeable fiscal consolidation, which will have a meaningful impact on demand – so it will add to the pressure for the Bank of England to cut interest rates at its next meeting. Action was always more likely in December, after the Budget, than before; now, a cut seems virtually certain. A 50 basis point move is possible – which would be welcome news for many businesses.
In the meantime, directors will be perplexed and concerned by the Chancellor’s latest volte face.
The Treasury would argue that it’s normal for different policy options to move in and out of contention as new data feeds into their models. That’s true enough. What is not normal is for such dramatic changes to be publicly visible.
The consistent message heard in recent weeks has been that an income tax hike was on the cards. Politically controversial as that would have been, given Labour’s manifesto pledges, it was the best available option for stabilising the public finances and putting the economy on the track to stronger growth – as we argued in our Budget submission.
That has all been ripped up. Income tax may yet play a role in the Budget – but this could be a case of increasing the take by freezing or even lowering thresholds, rather than increasing rates.
Treasury officials insist that the commitment to stable public finances, to the fiscal rules, and to increased capital spending remain unshaken. However, directors’ number one priority for government is policy stability – and they will be left scratching their heads about the current policy-making process.
Directors will be all too aware that 80% of the tax rises introduced in last year’s Budget fell on businesses. They took some comfort from indications that the Chancellor was taking a different approach this year, but will be asking what now lies ahead.
The government has been clear that it aims to deliver stronger growth, but that’s only possible if businesses and investors are confident about the business environment.
Constant policy noise is the worst thing possible for nurturing confidence. The last thing the Treasury should be doing is showing its workings.
Directors continue to stress their concerns about the Employment Rights Bill. Read the IoD’s response to this week’s labour market data here.
About the author
Anna Leach is a well-known UK economist, who appears regularly in the broadcast and business media. She has over 20 years of experience in a variety of macroeconomic and policy roles in business organisations and the civil service.
Prior to joining the IoD in 2024, Anna was Deputy Chief Economist at the Confederation of British Industry (CBI), where she was responsible for macroeconomic analysis, business surveys (economic, policy and commercial) and economic consulting.
Earlier in her career, Anna was a member of the Government Economic Service, where she undertook policy roles at the Department for Work and Pensions, looking at labour market issues, and in the HM Treasury economic analysis team. Anna has an MSc and a BSc from the University of Warwick, both in Economics.
Director Magazine
This article is published as part of IoD Director, the authoritative voice of UK business leadership.
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