Chancellor Rachel Reeves

Ms Reeves had previously hinted at tax rises or “deep cuts” to public investment to fill a significant gap in her spending plans.

However, stronger-than-expected tax receipts, driven by higher wage growth, have provided the Treasury with more flexibility. A predicted downgrade in UK productivity is also understood to be less severe than previously feared.

Despite the reprieve, tough choices are said to remain. The Chancellor is still committed to building larger “fiscal headroom” – a buffer against future economic shocks.

While income tax rates will not be hiked, other revenue-raising measures have not been ruled out. The Treasury is reportedly still considering a “smorgasbord” of smaller tax changes, including new levies on electric vehicles and limits on salary sacrifice schemes.

A “stealth tax” by freezing income tax thresholds—a move that pulls more earners into higher tax brackets as their pay rises – is also understood to be a option for raising significant funds.

Downing Street insisted the “thrust” of the Chancellor’s recent warnings about the UK’s economic challenges “still stands” and that she remains focused on “resilient public finances.”

The apparent U-turn caused a brief sell-off in UK government bonds (gilts) on Friday morning as borrowing costs rose, though the market stabilised as the OBR reasoning emerged.

Helen Miller, director of the Institute for Fiscal Studies (IFS), warned that investors may now “worry that the Chancellor will instead increase a range of smaller taxes that can be more damaging to economic growth” or that the government is reluctant to make “politically difficult” decisions.

Health Secretary Wes Streeting welcomed the news, stating it was “really important that we keep the promises that we made to the public” and “rebuild trust in politics”.