The Chancellor’s lost control: Rachel Reeves accused of presiding over most shambolic Budget in history after humiliating U-turn on income tax hikes

Rachel Reeves was accused of turning Britain into an ‘economic laughing stock’ after she suddenly abandoned her plans to raise income tax.

The Chancellor spent weeks laying the ground for a manifesto-breaking hike in taxes for millions of workers in this month’s Budget, before sparking chaos in the City on Friday by performing a shock U-turn.

Government sources said the change of heart came after improved forecasts from the Office for Budget Responsibility (OBR) watchdog left her with a £20 billion black hole to fill – far less than had been feared.

But she faced accusations that she made the dramatic move, which came after botched No 10 briefings about a possible coup against Keir Starmer, because Labour MPs feared losing their seats if she broke the party’s pre-election pledge not to take more money from workers.

While Treasury sources poured cold water on suggestions Ms Reeves would change income tax thresholds, she is odds-on to freeze the current bandings for several more years, pulling millions into higher tax brackets.

And instead of the single bold move of increasing income tax, the Chancellor will have to find other ways to plug the financial gap, opening the door to a raft of other rises.

Shadow Chancellor Mel Stride told the Daily Mail: ‘We are witnessing the most shambolic pre-Budget period in memory.  The constant leaking, briefing and kite-flying is fuelling uncertainty and damaging our economy. 

‘Markets are unnerved and business confidence is at a record low.  This is chaos on an industrial scale. We are becoming an economic laughing stock under Labour.’

Earlier this month Ms Reeves was pictured leaving Downing Street with part of her diary visible, and the word ‘Thresholds’ to describe one meeting

Former chancellor Sir Jeremy Hunt told Times Radio: ‘The whole world is reading this information and they’re looking at British economic decision-making. 

‘And it looks very chaotic and I don’t think that’s a good thing.’

It had been widely expected over the past month that Ms Reeves would have to increase income tax in her make-or-break Budget speech on November 26 in order to balance the books.

She gave an unexpected ‘scene-setter’ speech in Downing Street last week in which she failed to rule out hiking taxes, and in an interview on Monday gave her strongest hint yet, telling the BBC: ‘It would, of course, be possible to stick with the manifesto commitments, but that would require things like deep cuts in capital spending.’

It was thought she had told the OBR she planned to increase the basic rate of income tax for the first time in 50 years, raising it by 2p but offsetting it by a 2p cut in employee National Insurance, in order to raise £6 billion.

But on Thursday night the Financial Times revealed that she had ‘ripped up’ the proposal, sparking a sell-off in gilts when markets opened that briefly sent government borrowing costs soaring.

Nigel Green, chief executive of global financial advisory firm deVere Group, warned: ‘This is exactly how credibility shocks begin. The reaction is unmistakable. 

‘Bond traders are telling the Treasury that they will not tolerate mixed signals.’

Anna Leach, of the Institute of Directors, said: ‘The public airing of the Treasury’s workings is deeply damaging to business confidence and the ability of business leaders to plan and invest.’ 

Even Labour’s favourite think-tank, whose former boss Torsten Bell is helping to write the Budget, said ‘excessive levels of Budget kite-flying risk exacerbating market uncertainty’. 

Ruth Curtice, chief executive of the Resolution Foundation, said: ‘It is not normal for so much of that to be laid bare in public.’ 

Polling by YouGov found that almost two-thirds of Britons (63 per cent) believe the Government is handling the upcoming Budget badly, although most (58 per cent) think not raising income tax is the right decision.

An expected ‘smorgasbord’ approach for Ms Reeves to claw money from wherever she can will likely see measures such as pay-per-mile charges introduced for electric car drivers, higher gambling taxes and cuts to tax relief for workers who use ‘salary sacrifice’ schemes to buy expensive bicycles.

Her income tax U-turn was welcomed by Health Secretary Wes Streeting, who told LBC radio: ‘I’m not in favour of breaking manifesto pledges.’

Labour MPs told the Politico website that Sir Keir and Ms Reeves had ‘bottled’ a bold move and ‘put short-term survival before national interest. Which is pretty unforgivable’.

A Treasury spokesman said: ‘We do not comment on speculation around changes to tax outside of fiscal events.’