Financial markets grow fretful after reports of UK government abandoning
income tax hike
[November 15, 2025] By
PAN PYLAS
LONDON (AP) — British financial assets were under pressure Friday on
growing speculation that the Labour government has ditched plans to
raise income taxes in a crucial budget at the end of the month.
Treasury chief Rachel Reeves was clearly considering becoming the first
Chancellor of the Exchequer in 50 years to increase the basic rate of
income tax. But widespread reports say she has decided against it,
causing investors to grow nervous over the uncertain budget process.
By late afternoon London time, the pound was 0.4% lower at $1.3137,
while the yield, or interest rate, on the British government's benchmark
10-year bond was up 0.13 percentage point at 4.57%.
The increase in the yield is particularly illustrative as it shows that
investors are demanding a bigger return on their bond holdings, a clear
sign that they are fretting about the outlook for the U.K.'s public
finances and the government's ability to act boldly over fears higher
income taxes would anger voters.
“This episode demonstrates the importance of the budget as a test of
market confidence in the U.K. government’s fiscal approach,” said
Deutsche Bank's chief U.K. economist, Andrew Goodwin.
“If the cause is political, with the government concerned about how
voters will react to income tax hikes, it may strengthen perceptions
that the government lacks the appetite to take tough fiscal decisions,”
he added.
It’s a high-stakes time for the government, which is languishing in the
opinion polls barely a year-and-a-half after coming to power and Prime
Minister Keir Starmer’s favorability ratings deep in negative territory.
Reeves had been expected to hike the main income tax rate in her budget
on Nov. 26, which would break Labour's central pledge in its manifesto
ahead of last year's general election, which saw the party sweep back to
power after 14 years.
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 Reeves has been laying the ground
for tax rises over recent weeks, and as recently as Monday, she
indicated that the alternative to breaking the manifesto pledge
would be “deep cuts” to public investment.
Wes Streeting, the health secretary who earlier this week was being
briefed by supposed allies to Starmer, welcomed reports that the
income tax has been abandoned, partly because it would have further
undermined trust in politics as a whole.
“It is really important that we keep the promises that we made to
the public at the last general election,” he said.
In recent days, Reeves received updated forecasts from the
independent Office for Budget Responsibility. An improvement would
lessen the need for Reeves to raise as much as money as she had been
planning for, and experts say stronger wage growth in recent months
will mean higher taxes coming into the Treasury.
The British economy, the sixth-largest in the world, has
underperformed its long-run average since the global financial
crisis of 2008-2009, and the center-left Labour government elected
in July 2024 has struggled to deliver the economic growth it said
was its driving mission.
Inflation remains stubbornly high and growth sluggish, frustrating
efforts to repair tattered public services and ease the cost of
living.
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