Reeves' Tax Strategy Shakeup Sparks Investor Concerns

UK finance minister Rachel Reeves has scrapped plans to increase income tax rates, sparking investor unease. In an attempt to avert political backlash, Reeves is exploring alternative revenue-raising methods but faces challenges in maintaining fiscal targets and market confidence. Sterling and bond prices reacted negatively to her decision.

British finance minister Rachel Reeves has abandoned plans to raise income tax rates in her upcoming budget, according to the Financial Times. This move aims to prevent political dissatisfaction but has unsettled investors, resulting in increased government borrowing costs.

Reeves, tasked with securing billions to meet fiscal targets, hinted that the government might need to break its election pledge and increase income tax rates. The announcement led Sterling to dip 0.3%, reaching a two-and-a-half-year low against the euro as investors remain concerned about her ability to stabilize public finances.

The negative market response continued as UK government bond prices fell sharply, pushing yields up by 12 basis points on long-dated gilts. Reeves previously assured investors of her commitment to tough measures to balance the government budget by 2029/2030. The potential revenue-raising strategy includes adjusting income tax thresholds, a move that could disproportionately impact lower-income workers.

(With inputs from agencies.)