Chancellor to scrap income tax hikes - report

(Sharecast News) - UK gilts came under pressure on Friday, after it was reported Rachel Reeves had ditched plans to increase income taxes in the Budget. The chancellor had been widely expected to raise the rate for both higher and basic income tax payers at this month's Budget, despite manifesto pledges to the contrary

But according to the Financial Times, the chancellor has "ripped up" the proposals.

Citing unnamed officials briefed on the move, the FT said Number 11 was concerned any hike would anger voters and antagonise Labour MPs.

The reported U-turn unnerved investors, however, and gilts sold off steeply on Friday morning. The 10-year yield was up 13bps points at 4.57% at the start of trading.

The pound was also weaker against both the dollar and the euro.

The FT reported that the change in tack had been included in the Treasury's latest submission of major measures to the Office for Budget Responsibility on Wednesday.

The Treasury said: "We do not comment on speculation around changes to tax outside of fiscal events.

"The chancellor will deliver a Budget that takes the fair choices to build strong foundations to secure Britain's future."

Kathleen Brooks, research director at XTB, said: "We do not know if this will mean all bands of income tax will be left unchanged, or if it will only means the basic rate will be unchanged.

"However, either way the chancellor is now faced with finding an alternative plug to fill the estimated £30bn fiscal black hole in less than two weeks.

"It also means that the chancellor has signalled billions of unfunded spending pledges, which the bond market is not fond of."

Neil Wilson, UK investor strategist at Saxo Markets, said: "Markets are now trading on the political as well as the fiscal. But the chancellor is riding a tiger - by trying to do anything and everything to please markets, Reeves is now at their mercy. Appeasement never works.

"The problem with not raising income tax is that it's mechanically the best lever; otherwise faced with such a large black hole, you have to scratch around with a load of smaller things, pulling all kinds of levers...that will probably squeeze growth even more."

Reeves is battling surging government spending and mounting debt alongside sluggish economic growth.

On Thursday, figures from the Office for national Statistics showed the economy unexpectedly shrank in September, after GDP contracted by 0.1%.

Inflation, meanwhile, although off highs, is still well above the Bank of England's long-term 2% target, at 3.8%, while interest rates remain high by historic standards, at 4%.