The Chancellor abandoned plans to increase income tax in the budget due to improved economic forecasts.
Rachel Reeves was expected to raise income tax amid a gaping gap in her spending plans, hinting on Monday that the alternative would be “deep cuts” to public investment.
But overnight reports claimed he had abandoned introducing an income tax rise in the November 26 budget over fears it could anger both voters and Labor MPs.
The PA news agency understands that strong tax revenues have improved the Office for Budget Responsibility's forecasts, allowing for a U-turn.
This is particularly the case for stronger salary performance: the higher the salaries, the more taxes are paid on them.
The reduction in productivity has also not been as serious as initially feared.
While Ms Reeves is no longer understood to be seeking an income tax rise, the Government is still said to have difficult decisions to make and further tax rises have not been ruled out.
Income tax thresholds could still be lowered while tax rates remain the same, a move that could raise billions of pounds for the Treasury.
Limits on pay sacrifice schemes, as well as new measures to tax electric vehicles, are still in play as the Treasury pursues a mixed bag approach of raising a series of smaller taxes.
The Chancellor is understood to have not changed her approach and still intends to give herself more fiscal space, a buffer against economic headwinds that could affect the government's spending plans.
The latest budget measures were introduced last week, rather than being a knee-jerk response to the turmoil in No 10 this week caused by an information war.
Ms Reeves has been laying the groundwork for tax increases in recent weeks, including during a morning speech on November 4 aimed at preparing the public for the Budget.
Downing Street insisted that the central idea of the speech “stands”.
The Prime Minister's official spokesman said: “She was very clear about the challenges facing the country and her priorities for addressing them.
“All of that still stands.”
The spokesperson declined to comment on budget speculation, but said the Chancellor would seek to “build more resilient public finances with room to maneuver to withstand global turmoil.”
This “would give companies confidence to invest and leave the Government freer to act when the situation requires it,” he added.
The government's borrowing costs rose in the wake of an apparent income tax U-turn on Friday morning.
Speculation about the change of 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 bond market subsequently stabilized somewhat as the reasoning behind the Treasury's decision-making became clear.
Among those who welcomed suggestions that the tax rise had been abandoned was Health Secretary Wes Streeting.
He told PA: “What I would say this morning is that it is really important that we deliver on the promises we made to the public at the last general election.
“The Conservatives ruined our economy, also our public services, but also 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.
He added: “But the news that Rachel Reeves has pulled out of a plan to increase income tax rates will leave investors concerned that the Chancellor will instead increase a series of smaller taxes that may be more detrimental to economic growth.
“They may also be concerned that the change in plans indicates that this Government is reluctant to do politically difficult things.
“These are the kinds of concerns that can lead investors to demand higher returns when they lend to the government.”
If the Government decides to increase a number of smaller taxes, they should also be reformed “so that they cause less damage to growth”, the IFS chief said.
