UK government borrowing costs have increased following reports that Chancellor Rachel Reeves will not raise income taxes in the upcoming Budget scheduled for 26 November. The yield on 10-year government bonds, also known as gilts, rose from 5.44% to 5.56%, reflecting higher borrowing costs for the government.
Financial markets are expressing concern over the government’s ability to meet its spending and borrowing commitments without increasing income tax. Typically, governing bodies borrow by selling gilts, promising to repay with interest at an agreed future date. Before the recent announcements, there was widespread speculation that tax hikes might be on the agenda.
Zeina Bain, managing partner at Sullivan Street Partners, noted that the decision to abandon tax increases took investors by surprise, raising questions about how the government plans to address its budget shortfall. Bain emphasized the implications for fiscal responsibility, suggesting that lowered confidence might lead to increased borrowing costs, further exacerbating financial challenges.
Emma Wall, chief investment strategist at Hargreaves Lansdown, remarked that unexpected budget rumors had affected market reactions, leading to a decline in the pound. She indicated concerns regarding Reeves’ ability to manage sufficient fiscal space for proposed spending plans.
Reeves has acknowledged the potential for both tax increases and spending cuts as part of her budget considerations. She is committed to achieving two key fiscal rules: not borrowing for day-to-day public spending and ensuring government debt decreases as a proportion of national income by the end of this parliamentary term. Estimates suggest she would need to find between £22 billion to £25 billion to meet these goals.
Recent forecasts from the Office for Budget Responsibility indicated a fiscal black hole of £20 billion, which might provide justification for Reeves to forgo tax increases. A Treasury spokesperson remarked that details of tax changes would only be disclosed during formal fiscal events, reinforcing the government’s cautious stance on budget speculation.
Source: https://www.bbc.com/news/articles/cy5qz4qdq95o?at_medium=RSS&at_campaign=rss