Financial markets have reacted sharply to speculation that Chancellor Rachel Reeves has abandoned plans to raise income tax in her upcoming Budget, triggering a significant sell-off in UK government bonds.
Market Turmoil Following Tax Speculation
Yields on 30-year government bonds, known as gilts, jumped by up to 14 basis points during early trading on Friday, while 10-year gilt yields also surged by 12 basis points - representing the largest single-day increase since July. The movement in yields directly impacts government borrowing costs, with rising yields indicating falling bond prices and more expensive debt issuance.
The market reaction followed reports in the Financial Times that Ms Reeves has decided against implementing an income tax increase at the November 26 Budget, despite facing an estimated £50 billion gap in her spending plans. The Chancellor had previously hinted that without additional revenue, the government would face "deep cuts" to public investment.
Breaking Manifesto Promises
The proposed tax increase would have represented a clear breach of Labour's election manifesto commitment not to raise income tax, national insurance, or VAT. This potential policy reversal had already drawn criticism from within the party, including from Labour's new deputy leader Lucy Powell, who warned it would damage "trust in politics".
According to the Financial Times, the decision to abandon the tax rise was communicated to the Office for Budget Responsibility on Wednesday, when the Chancellor submitted her list of "major measures" for inclusion in the Budget document.
Political Reactions and Alternatives
Health Secretary Wes Streeting welcomed the apparent U-turn, telling broadcasters: "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."
Culture Secretary Lisa Nandy had earlier insisted that Ms Reeves would not "play fast and loose with people's money" when questioned about the reports.
With the Chancellor having ruled out a return to "austerity" through spending cuts, the government may now need to consider increases across a wider range of smaller taxes to meet its self-imposed fiscal rules. One potential alternative mentioned in reports involves reducing income tax thresholds while maintaining current tax rates, which could generate billions for the Treasury without technically breaking the manifesto pledge.
The pound experienced initial volatility following the news but subsequently began to recover during trading. Conservative leader Kemi Badenoch described the reported U-turn as "good (if true)", while Liberal Democrat Treasury spokeswoman Daisy Cooper characterised it as an "11th hour screeching U-turn" that might spare families "yet another punch-in-the-stomach Budget".
