UK Income Tax Increase Plan Cancelled: Impact on Investors

UK Income Tax Increase Plan Stays on the Shelf

UK Chancellor Rachel Reeves has taken a step back from plans to raise income tax in the upcoming budget. This decision has raised concerns among investors about how the budget deficit will be closed, leading to a wave of selling in government bonds.

Increasing Debates in Domestic Politics

According to sources close to the matter, it has been stated that Reeves has refrained from increasing the basic and higher income tax rates due to fears of undermining the Labour Party's election promises. Additionally, Reeves is reconsidering the plan to maintain an exit tax on wealthy individuals leaving the UK, and there is a possibility of providing flexibility in legislation that forecasts higher taxes on limited liability partnerships.

Quick 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 the past three months. Pound sterling also lost 0.6% against the dollar on Friday, becoming the weakest currency.

Two Different Budget Strategies

Moreover, treasury sources 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 is stated that Reeves, who initially considered adopting the more aggressive plan, has been forced to adopt a more cautious approach due to increasing political pressure.

The £35 Billion Deficit Issue

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 in this budget, which will be announced on November 26, are expected to be clarified this week. The biggest challenge faced by the minister is closing the £35 billion budget deficit.

Some cabinet members have reacted to the government's policy proposals in recent weeks, and one official expressed concerns about Reeves raising income tax without convincing the public.