"Rachel Reeves has, it's been reported, binned plans to raise income tax in the Budget on 26 November. In recent weeks - specifically in that surprise speech - she had strongly indicated that a manifesto-breaking rise in income tax was both necessary and likely. Reports in various publications today claim she has now abandoned that idea, which has seen gilt yields jump again. Volatility like this ahead of the Budget is very unusual, as is the constant briefing and kite flying of ideas."
"So it looks as though the pressure has told - now a new set of calculations need to be considered, ones which rely on squeezing lots of different parts of the fiscal balloon at the same time. As the IFS points out, using other means to raise tax will feed back more directly into lower growth and productivity, further hampering the efforts to reduce debt."
"We've been noting here the risks involved in raising income tax - specifically that while it would tend to calm markets, it would inflame voters and MPs, leading to political instability as both Reeves and PM Starmer would be fighting for their jobs, and likely lose."
Reeves reportedly abandoned plans to raise income tax in the Budget, reversing earlier signals of a manifesto-breaking rise. That change prompted gilt yields to jump and added unusual pre-Budget volatility from frequent briefings. Raising income tax would calm markets but inflame voters and MPs, risking political instability and leadership challenges. Alternatives require squeezing many fiscal areas simultaneously, but other tax-raising methods feed into lower growth and productivity, complicating debt reduction. Possible Budget scenarios include moderate tax hikes with no major spending increases, larger tax hikes enabling Bank of England cuts, or smaller hikes that risk higher yields and credibility loss.
Read at London Business News | Londonlovesbusiness.com
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