The tax ‘waffle bomb’ has detonated under Labour – so will it bury Rachel Reeves?

What a chaotic moment on Downing Street. On Wednesday, just before someone speaking on the prime minister’s behalf decided to pour petrol on the fire of leadership speculation, Starmer and Reeves “ripped up” their plans for the Budget.

Reeves wrote to the Office of Budget Responsibility to set out the “major measures” that she intended to announce so that the OBR could mark her homework and estimate the effect on the public finances. A rise in the basic rate of income tax was not one of them.

It is a screeching U-turn and one that stinks of panic. The less benign explanation for it is that decision-making at the heart of government is chaotic, as the anonymous briefing against Wes Streeting suggests. I still do not believe that Reeves’s “scene-setter” speech was some too-clever-by-half attempt at expectations management – making everyone fear an income-tax rise so that they would be relieved when it didn’t happen.

It also smacks of an overly jittery reaction to a previous round of OBR forecasts that convinced Starmer and Reeves that the Budget was going to be such a political disaster that they would have to prepare the markets and public opinion for it. That would fit with the briefing against Streeting, if Starmer thought the reaction to the Budget would be so bad that his job would be at risk.

Now it seems that the prime minister and chancellor think they can just about get through it without a catastrophic and explicit manifesto breach. That means confusion in the markets, which had been reassured that Reeves was prepared to take a politically poisonous decision for the sake of keeping debt under control.

So what has changed? I have said before the only reason that Starmer and Reeves had decided to bite the bullet and break the manifesto promise on tax in the first place is that they had no choice. It seemed that there was no way that they could bridge the gap in the public finances by what the FT describes as a “smorgasbord” of small rises in sin and stealth taxes – so they had to raise one of the big taxes that they had promised not to: income tax, national insurance, VAT or corporation tax.

Now it turns out that they do have a choice, and they think they can do it without a big manifesto-breaking bazooka. It may involve, the FT reports, reducing income tax thresholds, rather than simply freezing them, which means people will pay more income tax, but that the basic rate would remain the same, at 20p in the pound.

If the OBR’s forecasts are better than expected, that is one thing. These early forecasts will have been sent by the OBR to the Treasury in the last few days, as part of the to-and-fro in the weeks before a Budget.

Most people will see this as breaking the promise in the manifesto, but Reeves will argue that she has not increased the tax “rate” – and that was what she promised in the (ambiguously worded) manifesto: “Labour will not increase taxes on working people, which is why we will not increase national insurance, the basic, higher, or additional rates of income tax, or VAT.”

Once again, she will be relying on semantics, just as she did last year, when she claimed that employers’ national insurance contributions were not national insurance paid by “working people”.

But what is clear is that she didn’t think this was possible 10 days ago, which is why she gave that unusual early morning speech – “one long waffle bomb”, as Kemi Badenoch put it – telling us that “we will all have to contribute” and “each of us must do our bit”. She definitely thought she was going to have to break the manifesto explicitly, because she said in one of the interviews afterwards that she could stick to the manifesto, but that would mean cutting the capital investment programme.

The chancellor may not have been playing the expectations management game on purpose, but if she gets away with this, Labour MPs who were gloomy about the prospect of a rise in the basic rate of income tax will be so relieved that they may carry her shoulder-high from the despatch box after she delivers her Budget in 12 days’ time. But make no mistake, that “waffle bomb” has now exploded under Rachel Reeves. This is an operation riven with self-doubt.