The Chancellor has abandoned plans to hike income tax at the Budget because of improved economic forecasting.

Rachel Reeves had been expected to hike income tax in the face of a yawning gap in her spending plans, hinting as recently as Monday that the alternative would be “deep cuts” to public investment.

But reporting overnight claimed she has abandoned introducing an income tax rise at the November 26 Budget over fears it could anger both voters and backbench Labour MPs.

The PA news agency understands the strength of tax receipts has improved forecasting from the Office for Budget Responsibility, allowing for the U-turn.

This is particularly the case on stronger wage performance: the higher wages are, the more tax is paid on them.

A downgrade in productivity has also not been as bad as was first feared.

While Ms Reeves is no longer understood to be pursuing an income tax hike, tough choices are still said to lie ahead for the Government and other tax rises have not been ruled out.

Income tax thresholds could still be reduced while tax rates are kept the same, a move which could raise billions of pounds for the Treasury.

Limits to salary sacrifice schemes, as well as new measures to tax electric vehicles, are still in the mix as the Treasury pursues a “smorgasbord” approach of raising a range of smaller taxes.

The Chancellor has not changed her approach, it is understood, and still intends to give herself larger fiscal headroom – the buffer against economic headwinds which could impact Government spending plans.

The latest Budget measures were submitted last week, rather than being a knee-jerk response to the turmoil in No 10 this week sparked by a briefing war.

Ms Reeves has been laying the ground for tax rises over recent weeks, including during an early-morning speech on November 4 aimed at preparing the public for the Budget.

Downing Street insisted that the thrust of the speech “stands”.

The Prime Minister’s official spokesman said: “She was very clear about the challenges the country faces and her priorities in addressing those challenges.

“All of that still stands.”

The spokesman refused to comment on Budget speculation, but said the Chancellor will aim to “build more resilient public finances with the headroom to withstand global turbulence”.

This would “give businesses the confidence to invest and leaving the Government freer to act when the situation calls for it”, he added.

Government borrowing costs rose in the wake of the apparent U-turn on income tax on Friday morning.

Speculation about the change in direction sparked a sell-off in UK Government bonds, also known as gilts: the means by which the Government borrows money from private investors.

The gilt market later stabilised somewhat as the reasoning behind the Treasury’s decision-making became apparent.

Among those who welcomed suggestions the tax rise had been abandoned was Health Secretary Wes Streeting.

He told PA: “What I would say about this morning is, it is really important that we keep the promises that we made to the public at the last general election.

“Our economy was broken by the Conservatives, so were our public services, but so was trust in politics itself.

“Our job is to rebuild the economy, rebuild our public services, and rebuild trust in politics.”

Helen Miller, director of the Institute for Fiscal Studies (IFS) think tank, said it was “not unusual” for chancellors to make last-minute changes to their Budget plans.

She added: “But the news that Rachel Reeves has backed away from a plan to increase the rates of income tax will lead investors to worry that the Chancellor will instead increase a range of smaller taxes that can be more damaging to economic growth.

“They may also worry that the change of plans signals that this Government are reluctant to do politically difficult things.

“These are the kinds of concerns that can lead investors to demand higher returns when lending to the Government.”

If the Government does choose to raise a set of smaller taxes, they should also be reformed “so that they do less damage to growth”, the IFS chief said.

Stocks fell and bond yields spiked in volatile trading on Friday amid uncertainty over UK Budget proposals after an apparent U-turn on tax policy by Chancellor Rachel Reeves.

The FTSE 100 Index closed down 109.31 points, 1.1%, at 9,698.37. It had earlier traded as low as 9,610.45.

The FTSE 250 ended 175.95 points lower, 0.8%, at 21,819.56, and the AIM All-Share slid 8.95 points, 1.2%, at 746.51.

For the week, the FTSE 100 was up 0.2%, as was the FTSE 250, while the AIM All-Share fell 0.7%.

Market volatility came after the Financial Times reported Ms Reeves had ditched plans to raise income tax to help fill an expected fiscal deficit.

The Treasury signalled the change came because of more positive fiscal forecasts from the Office for Budget Responsibility, although Ms Reeves has also faced a concerted pushback from Labour MPs opposing the move.

“The Chancellor will deliver a fair Budget,” the Prime Minister’s spokesman told political reporters at the daily lobby briefing.

“The Chancellor has been very clear on the need to deliver stability in the public finances. She wants to give companies the confidence to invest,” the spokesman added.

But the spokesman refused to be drawn on “speculation” on the reported decision not to raise income tax.

Kallum Pickering, at Peel Hunt, said if Ms Reeves stays clear of raising income tax rates or lowering the thresholds at which they are paid, her remaining option would be likely to be to opt for a haphazard patchwork of smaller anti-growth tax increases.

“That would be a bad outcome. It would add to uncertainty, further damage the Government’s already tarnished credibility, and complicate any (Bank of England) judgment to potentially offset tax rises with rate cuts,” he said.

More positively, Goldman Sachs said if reports prove correct, it probably suggests that the fiscal deterioration is slightly less severe than initially assumed.

The broker now pencils in a total fiscal consolidation of £25 billion in the Budget later this month versus £30 billion previously, requiring gross tax increases of £30 billion versus £35 billion previously.

The uncertainty sparked an upward move in bond yields, which move inversely to prices.

The yield on the UK 10-year gilt rose to 4.57% from 4.44% on Thursday, while the 30-year yield jumped to 5.39% from 5.23%. Both have fallen sharply in recent weeks as hopes rise of lower interest rates.

Sterling was quoted at 1.3158 dollars at the time of the London equities close on Friday, lower compared with 1.3197 dollars on Thursday.

The euro stood at 1.1617 dollars, lower against 1.1644 dollars. Against the yen, the dollar was trading higher at 154.58 yen, compared with 154.31 yen.

In European equities on Friday, the CAC 40 in Paris closed down 0.8%, while the DAX 40 in Frankfurt fell 0.7%.

In New York, the Dow Jones Industrial Average was down 0.3% at around the time of the London close. The S&P 500 index was 0.4% higher, while the Nasdaq Composite rallied 0.6%.

All three major US indices fell heavily on Thursday amid tech weakness and growing doubts that the Federal Reserve will cut interest rates in December.

The yield on the US 10-year Treasury was at 4.13%, stretched from 4.11% on Thursday. The yield on the US 30-year Treasury was quoted at 4.73%, widened from 4.69%.

Federal Reserve Bank of Minneapolis president Neel Kashkari said he did not support the US central bank’s last interest rate cut, though he is still undecided on the best course of action for its December policy meeting.

“The anecdotal evidence and the data we got just implied to me underlying resilience in economic activity, more than I had expected,” Mr Kashkari said in an interview with Bloomberg News. That, he said, argued for a pause to rate cuts at the Fed’s October meeting.

Back in London, a handful of stocks were in the green on the FTSE 100, with DCC, up 1.7%, leading the way.

Gold miners Endeavour Mining and Fresnillo were prominent fallers, down 2.9% and 1.7% respectively, as the gold price fell.

Gold traded sharply lower at 4,101.80 dollars an ounce on Friday against 4,206.40 dollars on Thursday.

Bookmaker Entain slumped 3.7%, with a hike in gambling taxes thought to be high on the list of likely Budget rises. William Hill owner Evoke fell 4.3%.

Banks weakened on fears the Budget uncertainty will knock economic growth, with Barclays off 3.2%, Lloyds down 2.8% and NatWest down 3.6%.

Land Securities fell 5.3%, with market uncertainty taking the shine off first-half results.

The London-based commercial property development and investment company said it continued to see “clear positive momentum across every part of our business” as it raised its interim dividend to 19p per share, up 2.2% from 18.6p a year ago.

In addition, Land Securities raised its like-for-like net rental income guidance for its current financial year ending March 31 to between 4% and 5%, up from its previous guidance between 3% and 4%.

Melrose Industries closed down 1.2% despite a positive trading update.

The Birmingham-based aerospace manufacturing company said group revenue grew by 14% in the four months to October 31, with Engines up 28%, driven by a strong performance in both original equipment and the aftermarket, and Structures up 5%.

Adjusted operating profit was significantly higher than the comparative period and in line with expectations, the firm said.

Brent oil was quoted higher at 64.57 dollars a barrel at the time of the London equities close on Friday, from 63.14 dollars late on Thursday.

The biggest risers on the FTSE 100 were DCC up 82 pence at 5,020p, WPP, up 1.8p at 288.3p, Burberry Group, up 4p at 1,232p, AstraZeneca, up 38p at 13,532p and Rentokil Initial, up 1.1p at 403.6p.

The biggest fallers on the FTSE 100 were Land Securities, down 34p at 613p, Kingfisher, down 12.4p at 295.6p, Entain, down 27p at 700.4p, NatWest, down 22.4p at 600.8p and Barclays, down 13.75p at 413.5p.

Monday’s global economic calendar has Canadian CPI data, Japan GDP and industrial production figures, and the New York empire state manufacturing index.

Monday’s UK corporate calendar has half-year results from storage company Big Yellow Group.

Later in the week results are due from tobacco company Imperial Brands along with a third-quarter trading update from sports clothing and footwear retailer JD Sports Fashion.

Contributed by Alliance News