The pound has fallen and UK government borrowing costs have risen amid growing uncertainty over the autumn budget, after Chancellor Rachel Reeves abandoned plans to raise income tax. The move, which would have broken Labour's manifesto pledge, has left investors questioning how the government will cover its fiscal shortfall ahead of the 26 November fiscal event.
The FTSE 100 fell nearly 2% on Friday, hit by both domestic jitters and global fears over an AI tech bubble dragging on US stocks. Investors are also concerned that the Federal Reserve may delay cutting interest rates in December, following the US government shutdown and its impact on data releases.
Consultancy firm AlixPartners warned that prolonged uncertainty around fiscal policy is causing decision paralysis at UK businesses. 'Taxation has become the UK’s own tariff, undermining business with the same unpredictability as any trade barrier,' the firm said, adding that 'the real damage for companies comes from prolonged uncertainty and speculation that paralyse strategic planning and investment decisions.'
Investors are reportedly piling bets against the pound, which has dropped 3% against the US dollar over the past three months to about $1.315, making it the second worst performing G10 currency. Analysts from Bank of America noted that traders are amassing short positions on the UK currency.
Political editor Pippa Crear confirmed that sources are now ruling out cutting thresholds for higher rates of income tax, but expect 'income tax thresholds to be frozen for another two years, taxes on salary sacrifice schemes, fuel duty equivalent for electric vehicles - plus a smorgasbord of other measures.' The left-leaning New Economics Foundation warned that any tax rise should be progressive, starting with the wealthiest, and not push up inflation.
