Financial markets reacted sharply on Friday as Chancellor Rachel Reeves' decision to abandon planned income tax increases triggered the largest single-day surge in government borrowing costs since early July, accompanied by a significant sell-off of the pound.
Market Turmoil Following Tax Policy Reversal
The yield on 10-year government bonds, known as gilts, jumped by more than 0.13 percentage points to approximately 4.575%, marking the highest level witnessed in a month. This dramatic movement represents the most substantial daily increase since July, when Reeves' emotional parliamentary appearance previously unsettled investors.
Simultaneously, the pound experienced considerable pressure against the US dollar, declining by approximately 0.3% to trade at $1.3155. This currency weakness reflects growing investor anxiety regarding the Chancellor's make-or-break budget scheduled for less than two weeks' time.
Political Uncertainty Fuels Market Jitters
The policy reversal emerged late Thursday following reports by the Financial Times, revealing Reeves' intention to scrap manifesto-busting income tax increases. This decision comes amid significant internal Labour party conflict and concerns that breaking manifesto pledges could provoke a backbench rebellion.
Andrew Wishart, senior UK economist at Berenberg bank, commented: "The income tax U-turn demonstrates a lack of political competence which has probably led investors to increase the probability they attach to a change in the leadership of the Labour party and government."
Wishart further warned: "The risk is that the Labour party replaces Keir Starmer and Rachel Reeves with a duo positioned further to the left on the economic policy spectrum and less committed to fiscal sustainability."
Broader Market Impact and Expert Analysis
The UK market turmoil occurred against a backdrop of global financial sell-offs driven by concerns about the US economy. The FTSE 100 index closed down more than 1% at 9,698 points, compounding the negative sentiment.
Ruth Curtice, chief executive of the Resolution Foundation and former Treasury official, highlighted concerns about the pre-budget communication strategy. While acknowledging that forecast changes before budgets are normal, she criticised "excessive levels of kite flying" for contributing to market volatility.
"It is not normal for so much of that to be laid bare in public," Curtice stated. "The market moves this morning and in recent weeks suggest a serious look should be taken at the approach to market-sensitive forecast information."
The Chancellor faces the challenging task of rebuilding at least £20 billion of headroom against her self-imposed fiscal rules while navigating both market expectations and political pressures ahead of the crucial November 26 budget announcement.
