Speculation of a major U-turn by the Chancellor on income tax has sent shockwaves through financial markets, triggering a sharp rise in the UK government's borrowing costs.
Market Reaction to Tax Speculation
Reports that Rachel Reeves has scrapped her plans to raise income tax at the upcoming November 26 Budget have ignited a significant sell-off in UK Government bonds, commonly known as gilts. These bonds are the primary mechanism through which the government borrows money from private investors.
The immediate financial consequence was a sharp jump in gilt yields, which move inversely to prices. Yields on 30-year gilts surged by as much as 14 basis points during early trading, while the yield on 10-year gilts also shot up by 12 basis points. This marked the most substantial increase since July. The pound also experienced an initial shock as markets opened, though it later began to stage a recovery.
The Political Dilemma Behind the U-Turn
The Chancellor had been widely expected to announce an income tax hike to address a substantial fiscal black hole in her spending plans, which some economists estimate could be as large as £50 billion. As recently as the previous Monday, she had hinted that the alternative to new taxation would be “deep cuts” to vital public investment.
However, according to a report in the Financial Times, the decision to abandon the tax rise was communicated to the Office for Budget Responsibility on Wednesday. The Chancellor submitted a list of “major measures” for her Budget, which notably excluded the planned income tax increase. The primary reason for the reversal appears to be the political fallout from breaking a key Labour election manifesto pledge not to raise income tax, national insurance, or VAT.
Cabinet Reaction and Future Options
The suggestion that the tax hike could be abandoned was met with approval from within the Cabinet. Health Secretary Wes Streeting welcomed the news, stating, “I’m not in favour of breaking manifesto pledges.” He emphasised the need to rebuild trust in politics, while also acknowledging the severe pressure on the public finances and the Chancellor's commitment to her fiscal rules.
Culture Secretary Lisa Nandy had earlier insisted that Ms Reeves would not “play fast and loose with people’s money.” With the Chancellor also vowing not to return to “austerity” through deeper spending cuts, her options to balance the books are narrowing. The government may now have to rely on increases in a wider range of smaller taxes or explore technical changes, such as freezing income tax thresholds, which could still raise billions for the Treasury without explicitly breaking the manifesto commitment.
The political opposition was quick to comment. Conservative leader Kemi Badenoch described the reported U-turn as “good (if true),” while Liberal Democrat Treasury spokeswoman Daisy Cooper labelled it an “11th hour screeching U-turn.”
