British financial markets experienced turbulence on Friday amid growing speculation that the Labour government has abandoned plans to raise income taxes in its upcoming budget. Treasury Chief Rachel Reeves had been considering increasing the basic rate of income tax, a move that would have marked the first such hike in 50 years. However, reports suggest she has decided against it, sparking investor unease over the government’s fiscal strategy. By late afternoon, the pound had fallen by 0.4% to $1.3137, while the yield on the UK’s benchmark 10-year bond rose by 0.13 percentage points to 4.57%. The bond yield increase reflects investor concerns about the UK’s public finances and the government’s ability to make bold fiscal decisions. Andrew Goodwin, Deutsche Bank’s chief UK economist, noted that the budget serves as a critical test of market confidence in the government’s fiscal approach. He added that political considerations, such as voter backlash against tax hikes, could reinforce perceptions that the government is unwilling to make tough decisions. The Labour government, elected in July 2024, faces significant challenges, including sluggish economic growth and stubbornly high inflation. Prime Minister Keir Starmer’s administration has struggled to deliver on its promise of economic revitalization, with public services strained and the cost of living crisis persisting. Reeves had previously indicated that breaking the manifesto pledge on taxes would necessitate deep cuts to public investment. However, updated forecasts from the Office for Budget Responsibility suggest stronger wage growth may reduce the need for such measures. Health Secretary Wes Streeting welcomed reports of the tax hike’s abandonment, emphasizing the importance of maintaining public trust by honoring election promises.
Financial markets grow fretful after reports of UK government abandoning income tax hike
