Chancellor Rachel Reeves has abandoned plans to raise income tax rates, triggering a sharp sell-off in UK markets. The pound fell and government borrowing costs rose as investors reacted to the policy reversal, which breaks Labour's manifesto pledge. The FTSE 100 dropped nearly 2%, wiping out £26 billion in value, amid a double blow of domestic uncertainty and global fears over an AI tech bubble.
The decision leaves a fiscal shortfall ahead of the 26 November budget, with Reeves now expected to freeze income tax thresholds for another two years and introduce taxes on salary sacrifice schemes and electric vehicles. Analysts warn that prolonged uncertainty is paralysing business investment, with AlixPartners describing taxation as 'the UK's own tariff'.
Investors are piling bets against the pound, which has fallen 3% against the US dollar over the past three months to $1.315, making it the second worst performing G10 currency. Bank of America reports growing short positions on sterling as markets question how the government will fund increased defence spending and potential scrapping of the two-child benefit cap.
The New Economics Foundation urged the government to be 'bold' and focus tax rises on the wealthiest, warning against cutting income tax thresholds that would drag low earners into paying taxes they cannot afford. It called for equalising capital gains tax with income tax rates to boost revenue without harming growth.
