- Analysts warn Chancellor ‘her days could be numbered’
The pound crashed to a seven-month low as Rachel Reeves laid the ground for a blizzard of tax hikes in the Budget – warning that ‘we will all have to contribute’.
Sterling fell below $1.31 against the US dollar for the first time since April, dropping as much as 0.6 per cent to $1.3056, and also drifted lower against the euro.
Government borrowing costs also edged lower as investors bet the Bank of England will be forced to cut interest rates to help prop up the economy following the Budget.
The FTSE 100 – London’s premier index of blue chip stocks – tumbled more than 100 points in early trading.
Analysts warned the Budget on November 26 was the Chancellor’s ‘last chance to fix the house, otherwise her days could be numbered’.
Sterling fell to its lowest level against the dollar since April as Rachel Reeves laid the ground for more punishing tax rises
The sell-off came as Ms Reeves repeatedly refused to rule out breaking Labour’s manifesto pledge not to raise income tax, national insurance or VAT.
She insisted she would do ‘what is right’ rather than ‘popular’ as she warned of ‘hard choices’ ahead.
‘She is justifying tough decisions to come in the Budget,’ said Kit Juckes, head of currency strategy at investment bank Societe Generale.
‘The fact that this is happening at all means that manifesto pledges will not be followed to the letter.
‘We’re going to have higher taxes.’
Ms Reeves is considering a proposal from the Left-wing Resolution Foundation to raise income tax by 2p, in what would be the first increase in the basic rate for 50 years.
The move could be partially offset by a 2p cut in National Insurance but would still raise an extra £6billion a year from pensioners and others.
She is also looking to extend the six-year freeze on tax thresholds, dragging millions more into higher tax bands, despite previously warning the move would break Labour’s manifesto pledge.
It is feared an income tax raid will hit household finances to such an extent that they will spend less – leading to lower inflation.
This could pave the way for the Bank of England to cut interest rates – making mortgages cheaper for millions.
Lower interest rates, or the prospect of them, tend to weaken a currency and bring down borrowing costs on the global bond markets.
The yield on ten-year UK gilts – a key measure of government borrowing costs – fell to a low of 4.38 per cent while the 30-year yield dropped to its lowest level since April at 5.15 per cent at one stage.
However, yields then edged back up a little as investors baulked at a lack of detail in Ms Reeves’ speech about exactly what she has planned.
‘Rachel Reeves’ unusual stance of giving a big speech on the eve of the Budget has left investors with more questions than answers, and done nothing to remove uncertainty around taxes,’ said Dan Coatsworth, head of markets at AJ Bell.
‘The bond market would be happy if the chancellor raises taxes as it would help to improve public finances and make the UK less risky from an investment perspective. It was telling that the ten-year gilt yield fell as Reeves began her speech, indicating that bond investors thought we’d get confirmation that taxes would go up at the Budget. But as it became clear that Reeves was merely dancing around the topic, yields went back up.
‘The Chancellor said the speech was about giving context to the challenges facing the government, but she batted away questions about taxes faster than an Olympic table tennis player.
‘Many people are fed up with this game. There are growing calls for the Chancellor to be crystal clear in her plans and make bolder decisions. No-one will be shocked at tax rises and many people believe it is better to sort the situation out once and for all, rather than keep tinkering at the edges. This feels like Reeves’ last chance to fix the house, otherwise her days could be numbered.’
