Market Shock as Chancellor Abandons Income Tax Rise
Financial markets experienced significant turbulence following reports that Chancellor Rachel Reeves has abandoned plans for an income tax increase that would have broken a key manifesto pledge. The surprise decision triggered a massive sell-off, wiping approximately £26 billion from the value of the FTSE 100 index on Friday, November 14, 2025.
Gilt Yields Spike and Mortgage Costs Threatened
The uncertainty surrounding the government's fiscal policy caused immediate ripples through the UK's financial infrastructure. The yield on 10-year government gilts, a crucial benchmark for borrowing costs, jumped to 4.57% in early trading—marking its largest single-day increase since July. While it later eased to around 4.50%, longer 30-year gilt yields reached 5.32%.
This surge in government borrowing costs spells potential trouble for homeowners and prospective buyers. As Dan Coatsworth, head of markets at AJ Bell, explained, gilt yields are used by lenders to price long-term mortgage products. Higher yields threaten to push up fixed-rate mortgage costs, creating fresh challenges for those attempting to get on the property ladder or remortgage.
The anxiety was particularly evident in banking and property sectors. Shares in major lenders like Lloyds and NatWest fell sharply, alongside housebuilding giants Berkeley, Barratt, Redrow, and Persimmon.
Credibility Questions and Budget Black Hole Loom
The Chancellor's U-turn appears to have been prompted by more favourable than expected forecasts from the Office for Budget Responsibility (OBR). However, the sudden policy shift has raised serious questions about the government's economic strategy.
Nigel Green, CEO of deVere Group, did not mince words: "This is exactly how credibility shocks begin. Gilts are sliding, borrowing costs are climbing, and sterling is weakening because markets fear the government is improvising." He drew parallels with the Truss mini-Budget turmoil of 2022, warning that bond traders "will not tolerate mixed signals."
Meanwhile, the pound fell 0.5% against the US dollar, adding to the day's financial pressures. This market reaction comes amid separate reports that the OBR will inform the Chancellor of a looming £20 billion black hole in the public finances that must be addressed in the upcoming Budget on November 26.
Hal Cook, senior investment analyst at Hargreaves Lansdown, noted that investors had been counting on tax rises to tackle the UK's deficit. "The news that the likely income tax rises have been scrapped hasn't gone down well with gilt investors," he stated, while cautioning that the market moves might represent an over-reaction until the government reveals its alternative plans.
The Treasury has sought to calm nerves, issuing a statement that the Chancellor will deliver a Budget that "takes the fair choices to build strong foundations to secure Britain’s future." All eyes will now be on Rachel Reeves and Prime Minister Keir Starmer as they navigate this period of intense market scrutiny.
