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Government Borrowing costs have soared in the wake of the apparent income tax U-turn chancellor,
There is speculation that Rachel Reeves has canceled its plan to raise income taxes Budget has promoted selling in UK government Bond, also known as gilt: Instrument by which the government borrows money from private investors.
The Chancellor had been widely expected to raise income taxes due to the wide gap in her spending plans, with her hinting as recently as Monday that the alternative would be “deep cuts” to public investment.
But the Financial Times reports that he has now given up introducing those plans in the Budget on November 26 because he fears they could anger both voters and back bench Labor MPs.
The tax increase would break the Labor Party’s election manifesto pledge not to raise income tax, National Insurance or VAT.
Yields on 30-year gilts rose as much as 14 basis points in early trading, and yields on 10-year gilts also rose by 12 basis points – the biggest rise since July.
Yields move inversely to a bond’s price, meaning that prices fall as yields rise.
The pound also took an initial hit as soon as the market opened, but then started to recover.
The suggestion that the tax increase could be abandoned was welcomed by Health Secretary Wes Streeting.
He told the PA news agency that the Government did not comment on market movements “on a policy basis”, but added: “What I would say this morning is that it is really important that we keep the promises that we made to the public at the last general election.
“The Conservatives have broken our economy, our public services, but also trust in politics.
“Our job is to rebuild the economy, rebuild our public services and rebuild trust in politics.”
The Health Secretary also told broadcasters: “The fact that there has been speculation about an increase in income tax, I think it shows two things.
“Firstly, how challenging the situation is in the public finances, and secondly, how determined the Chancellor is to stick to his financial rules.
“I think what we’ve learned from some of the latest speculation overnight is that it’s probably wise to stop speculating and wait for the Budget. The Chancellor will only make choices she believes are the right choices for the long-term future of the country.”
Culture Secretary Lisa Nandy had earlier insisted Ms Reeves would not “play fast and loose with people’s money” when questioned about reports an income tax rise had been left out.
According to the Financial Times, the decision not to raise taxes was communicated to the Office for Budget Responsibility on Wednesday, when the Chancellor submitted a list of “key measures” to be included in his budget.
An income tax rise would help them bridge the fiscal crisis, which some economists have estimated at £50 billion, but it would also break Labour’s manifesto pledge not to raise income tax, National Insurance or VAT.
The possibility of a breach of the manifesto was criticized earlier this month by Labour’s new deputy leader Lucy Powell, who said it would damage “confidence in politics”.
Having vowed not to return to “austerity” through deep spending cuts, the Chancellor may now have to rely on a wide range of small tax rises if he is to stick to his self-imposed rules on debt and borrowing.
The Financial Times suggested that one option would also be to reduce the income tax threshold while keeping tax rates the same, which could raise billions of pounds for the Treasury.
Conservative leader Kemi Badenoch said the alleged U-turn is “good (if true)”.
Liberal Democrat deputy leader and Treasury spokeswoman Daisy Cooper described the move as a “catastrophic eleventh-hour U-turn”, but said struggling families could be spared “another stomach-churning budget”.