UK Income Tax Rise Plan Cancelled: Impact on Investors

Plan for Income Tax Increase in the UK Stays on the Shelf

The UK Chancellor of the Exchequer Rachel Reeves has stepped back from plans to increase income tax in the upcoming budget. This decision has raised concerns among investors about how the budget deficit will be addressed, leading to a wave of selling in government bonds.

Growing Debates in Domestic Politics

According to sources close to the matter, it is stated that Reeves abandoned increasing the basic and higher income tax rates due to fears of breaking the Labour Party's election promises. Additionally, Reeves is reportedly reconsidering her plan to maintain an exit tax for wealthy individuals leaving the UK and is considering providing flexibility in proposed regulations that would impose higher taxes on limited liability partnerships.

Rapid Response in Bond Markets

The bond market reacted quickly to this decision, with 10-year bond yields rising to 4.57%, marking the largest daily increase in three months. The pound also lost 0.6% against the dollar on Friday, becoming the weakest currency.

Two Different Budget Strategies

Meanwhile, treasury sources have reported that Chancellor Reeves has prepared two different budget drafts. One budget includes more controversial tax increases, while the other focuses on minor adjustments. It has been indicated that Reeves, who initially considered adopting the more aggressive plan, has been forced to shift to a more cautious approach due to rising political pressures.

£35 Billion Deficit Problem

According to a report by Bloomberg, Reeves has not yet made a definitive decision on which policies will be announced due to disagreements within the cabinet. Significant measures are expected to be clarified this week ahead of the budget announcement on November 26. The biggest challenge facing the Chancellor is addressing the £35 billion budget deficit.

Some cabinet members have expressed reactions to the government's recent policy proposals, and one official expressed concerns that Reeves is hesitant to raise income tax without convincing the public.