2 godzin temu
UK financial markets tumbled on Friday morning after reports that Chancellor Rachel Reeves has abandoned plans to raise income tax ahead of the November 26 Budget. The FTSE 100 shed approximately £26 billion in value, dropping around 140 points in its sharpest one-day fall since April.
The sell-off extended across UK government bonds, with 10-year gilt yields jumping 13 basis points to 4.57 per cent, the biggest surge since July. The pound fell 0.5 per cent against the dollar and hit a two-year low against the euro. Banking shares bore the brunt of losses, with Lloyds down over 3 per cent, NatWest shedding 2.86 per cent, and Barclays falling 2.55 per cent.
Reeves had reportedly planned to increase income tax by 2p while cutting national insurance by an equivalent amount. The move would have addressed a significant portion of an estimated £20 billion budget shortfall but would have contradicted Labour's election pledge against raising taxes on working people. The chancellor appears to have scrapped the proposal after receiving forecasts from the Office for Budget Responsibility.
Expert warnings
Market analysts issued sharp warnings about the policy reversal. Nigel Green, chief executive of deVere Group, said: «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. There's nothing investors hate more than indecision disguised as strategy.»
Kathleen Brooks, research director at XTB, warned: «Bond market volatility is not what the Chancellor wants to see with less than two weeks to go before the budget.» She added that bond markets were signaling the chancellor «cannot merely tax the 'rich' to fund her lavish spending pledges».
Thomas Pugh, chief economist at RSM, cautioned that ruling out income tax rises could force the government toward «tax changes that are either inflationary, have severe distortionary effects, or worse, both». Kallum Pickering, chief economist at Peel Hunt, warned of a potential «haphazard patchwork of smaller anti-growth tax increases».
Impact on borrowing costs
Rising gilt yields threaten to push up fixed-rate mortgage costs, as lenders use government bonds as pricing benchmarks. Dan Coatsworth, head of markets at AJ Bell, explained: «The situation is bad news for mortgage lenders as pricier home loans could make it more challenging for certain people to get on the housing ladder. That explains the sell-off in banking shares including Lloyds and NatWest as well as housebuilders Berkeley, Barratt Redrow and Persimmon.»
The U-turn leaves Reeves searching for alternative revenue sources to plug the budget gap. Economists estimate she needs to consolidate fiscal policy by up to £35 billion. The market turbulence has drawn comparisons to the 2022 Liz Truss mini-Budget crisis, when bond market panic forced policy reversals.
Global pressures
UK markets also faced headwinds from Wall Street, where major indices fell sharply on Thursday amid concerns over tech valuations and AI spending. The S&P 500 and Dow Jones both closed 1.7 per cent lower, while the Nasdaq plunged 2.3 per cent. Coatsworth noted: «Wall Street gloom has spread across European and Asian markets like a contagious disease.»
Chris Beauchamp, chief market analyst at IG, said UK banks faced a «perfect combination of global growth worries and UK-specific concerns around the Budget». Despite the volatility, some analysts suggested the market moves could prove to be over-reactions once the full Budget details emerge.
Note: This article was created with Artificial Intelligence (AI).
