Reeves Rethinks Tax Plans in Response to Political Pressure

UK Finance Minister Rachel Reeves reversed plans to raise income tax due to political pressure. Previous signals of tax hikes had reassured investors, but recent changes imply smaller, complex tax increases. Economic experts warn this may harm credibility and disproportionately impact lower-income workers.

British finance minister Rachel Reeves has reversed her decision to raise income tax in the upcoming budget announcement on November 26. The shift is reportedly influenced by apprehensions over dissent from lawmakers and voters.

Faced with a fiscal gap requiring tens of billions of pounds, Reeves's prior statements about everyone contributing to the fiscal targets had hinted at potential tax hikes. However, the latest reversal, reported by the Financial Times, slightly affected currency markets as sterling dropped 0.3% amid concerns about Britain's financial trajectory.

Investors initially found comfort in Reeves's readiness to enforce tough fiscal measures, which helped lower government bond yields. Yet, economists, including Kallum Pickering, caution that fragmented minor tax increases could further damage government credibility, complicating the Bank of England's rate decisions. Alternatives, like lowering tax thresholds, warn of economic strain on lower-paid workers, risking revived market confidence challenges as seen in Liz Truss's tenure.

(With inputs from agencies.)