UK government bonds sold off steeply on Friday as investors balked at an expected U-turn by Sir Keir Starmer and Rachel Reeves on plans to raise income tax rates in this month’s Budget to fill a hole of up to £30bn in the public finances.
The FT reported on Thursday night that the prime minister and the chancellor had ditched earlier proposals to break their manifesto pledge and raise the basic and higher income tax rates amid fears of a backlash from voters and some Labour MPs.
A sell-off in the gilt market on Friday pushed the 10-year yield up 0.1 percentage points to 4.54 per cent in early trading. Yields move inversely to prices.
The move put gilts on track for their worst one-day sell-off since investors fretted over the future of the chancellor in early July.
The pound was down 0.5 per cent against the dollar at $1.312 and hit a fresh more than two-year low against the euro.
Instead of raising income taxes, the chancellor could cut the thresholds at which people pay different rates. Reeves had already been expected to extend an existing freeze on personal tax thresholds.
People familiar with the matter said Reeves would also rely heavily on what has been dubbed the “smorgasbord” approach of increasing a range of narrowly-drawn taxes.
The U-turn comes days after a leadership crisis threatened to engulf Starmer’s premiership and forced health secretary Wes Streeting to deny he was challenging the prime minister.
However Downing Street officials insisted the Budget had not been rewritten in response to the briefing debacle.