Markets turned on the UK today after Rachel Reeves dramatically ditched Budget plans to hike income taxes amid a Labour revolt.
The Pound has taken a hit after the extraordinary U-turn emerged overnight, following weeks of signals that the move would go ahead. At one stage it was down around half a cent against the US dollar.
Interest rates on gilts – the main way the government borrows money – also spiked in early trading, although they eased back slightly after the Treasury issued a statement stressing the Chancellor’s determination to shore up the public finances.
Analysts warned that the UK could be facing a ‘credibility shock’ after a shambolic Budget run-up dominated by infighting and public contradictions.
Ms Reeves’ shift in approach appears to have been prompted by panic in Downing Street over the threat to Keir Starmer, with Labour MPs furious about the prospect of smashing manifesto promises.
But it leaves her scrambling to find other ways of filling the estimated £30billion black hole in the books, less than a fortnight before the critical package is unveiled.
The Financial Times said she is now looking at cutting tax thresholds to drag millions of people deeper into the system. That would represent a huge expansion of the hated ‘stealth raid’ that has been in effect for years.
Ms Reeves could then attempt to argue that the manifesto has been abided by – but critics would point out that ‘working people’ were suffering.
Only last week the Chancellor was delivering a highly unusual pre-Budget speech warning that ‘everyone’ will have to ‘contribute’ to shoring up the government’s books. She then stated publicly that cutting capital spending would be the only way to abide by the manifesto promises.
That was seen as confirmation of broad-based tax increases.
Nigel Green, CEO of global financial advisory deVere Group, warned that ‘mixed signals’ were spooking the markets.
‘This is exactly how credibility shocks begin,’ he said.
‘Gilts are sliding, borrowing costs are climbing, and sterling is weakening because markets fear the government is improvising. There’s nothing investors hate more than indecision disguised as strategy.’
He added: ‘The reaction is unmistakable. Bond traders are telling the Treasury that they will not tolerate mixed signals. They saw what happened during the Truss turmoil and they’ll not wait politely for clarity. They’re pricing risk in real time.’
The Office for Budget Responsibility is said to have been informed of Ms Reeves’ change of heart on Wednesday.
That was the same day Sir Keir was battered at PMQs over an apparent No10 pre-emptive strike against Cabinet ministers threatening to challenge his leadership.
Health Secretary Wes Streeting – the main target – publicly demanded the aides responsible for briefings were sacked and accused Downing Street of ‘self-destruction’.
Sir Keir has batted away calls to fire his chief of staff Morgan McSweeney. But the episode underlined the weakness of his position following a disastrous plunge in the polls.
Just 16 months ago he was parading into No10 after winning one of the biggest election majorities in modern political history.
Grim figures released on Tuesday also revealed that unemployment had hit the highest level in more than four years, potentially giving Ms Reeves more pause for thought. And there was more evidence of an economic slowdown yesterday, with GDP essentially flatlining in the third quarter.
Ms Reeves is now expected to rely on what has been dubbed a ‘smorgasbord’ approach – tinkering around the edges of the tax code to milk more money from workers and the better-off.
Such measures could include a new gambling levy and higher taxes on expensive properties.
The Cabinet is said to be so deeply divided on what to do that Ms Reeves had written two Budgets, one openly breaking the manifesto and another skirting round the edges of it.
A Treasury spokesman said: ‘We do not comment on speculation around changes to tax outside of fiscal events.
‘The Chancellor will deliver a Budget that takes the fair choices to build strong foundations to secure Britain’s future.’
Touring broadcast studios this morning, Culture Secretary Lisa Nandy was asked whether the government had any idea what it was doing.
She told Sky News: ‘I’ve known the Chancellor well for 15 years now, and I can tell you that she is solely and fiercely focused on the challenges facing the country and doing what is in the best interests of the country.
‘She’s never been shy of facing people down in order to do that in opposition and in Government.
‘Over the course of the last few weeks, obviously I’ve had some discussions with her and her team about measures in the Budget that may affect my department, proposals that we’re making, and discussions that ordinarily happen across Government, and in every one of those discussions, it’s been the public interest that she’s completely focused on.’
Earlier this month Ms Reeves was pictured leaving Downing Street with part of her diary visible, and the word ‘Thresholds’ to describe one meeting.
There was already a widespread expectation that the Chancellor would extend the long-running freeze on personal tax thresholds, introduced under the Tories.
Economists have warned that the number of those paying the 40p tax rate will top 10 million if that happens.
Almost one in five taxpayers will be dragged into paying 40 per cent or more tax on their income if, as expected, the Chancellor extends the ‘stealth tax’, the Institute for Fiscal Studies said.
Fiscal drag will mean even more of those in middle-class professions such as senior nurses, police officers and teachers pay the higher rate of tax.
For the first time since its introduction, all pensioners will also pay tax on their income from the full state pension in 2027-28 as a result, the think-tank said.
More minimum-wage workers will be pulled into paying tax due to frozen thresholds and substantial minimum wage rises, it added. And it said that a continuing freeze would mean more taxpayers are eligible for Universal Credit at a time when the benefits bill is increasingly unaffordable.
Extending the freeze on thresholds, brought in by Rishi Sunak in 2021, for a further two years until April 2030 would net her £8.3billion that year, according to the think-tank.
This is on top of the £42billion the policy is already expected to raise by 2027-28, when it was due to end.
A real-terms reduction in thresholds would mean anyone paying income tax or NI would see their taxes increase and also mean more taxpayers are dragged into higher tax brackets.
