Financial markets unsettled by last-minute change in Budget plans
Government borrowing costs climbed sharply and the pound weakened after Chancellor Rachel Reeves reversed plans to increase income tax in the forthcoming Budget. The decision, made shortly before the Budget’s finalisation, surprised investors who had anticipated tax rises to address a significant fiscal gap.
Yields on 10-year government bonds rose by over 10 basis points in early trading, reaching levels not seen since July.
Meanwhile, the pound fell by 0.5% against the US dollar, reflecting market concerns about the government’s strategy for managing its finances.
The chancellor’s move followed improved economic projections from the Office for Budget Responsibility (OBR), which indicated a smaller shortfall than previously forecast. However, the abrupt change came after weeks of signals that tax increases might be necessary to avoid breaching fiscal rules.
“Bond market volatility is not what the chancellor wants to see with less than two weeks to go before the Budget,” said Kathleen Brooks, research director at XTB, in a report by The Guardian. “Essentially, the bond market is warning the chancellor that she cannot merely tax the ‘rich’ to fund her lavish spending pledges. Either she broadens the tax base, or she cuts spending.”
The government had considered raising income tax by 2p while reducing National Insurance by the same amount, a measure that would have generated several billion pounds. This proposal was submitted to the OBR for costing earlier in the month, when the fiscal gap was estimated at £30 billion. Recent OBR assessments, however, suggested stronger wage growth and higher tax receipts, reducing the gap to around £20 billion.
Markets reacted strongly to reports of the policy reversal, with gilt yields peaking before easing slightly as news of the improved OBR forecast emerged. By mid-afternoon, yields hovered near 4.53%. Despite this, British assets remained under pressure, and the FTSE 100 index fell by nearly 2%, with major banks experiencing notable declines.
Commentators noted that the government’s decision to forgo an income tax rise has left uncertainty over how the remaining fiscal shortfall will be addressed. Some economists warned that relying on a series of smaller tax increases, rather than a headline income tax rise, could introduce additional risks.
Considerable risks with this approach: 1) revenues more uncertain; 2) greater risk of damaging economic impacts; 3) lots of angry interest groups, makes U-turns more likely; 4) viewed less favourably by bond market investors, many of whom were expecting an income tax rise. https://t.co/kdAnTvCert pic.twitter.com/kzCkzIXbtt
— Ben Zaranko (@BenZaranko) November 14, 2025
The chancellor has previously indicated that both tax increases and spending reductions are being considered for the Budget, with the aim of meeting self-imposed fiscal rules: not borrowing for day-to-day spending and reducing government debt as a share of national income by the end of this parliament.
Market analysts highlighted the potential implications for the Bank of England’s monetary policy, with some suggesting that a less restrictive Budget could complicate the outlook for interest rates.
“It is normal for economic forecasts and policies to change in the run up to the Budget,” said Ruth Curtice, chief executive of the Resolution Foundation. “It is not normal for so much of that to be laid bare in public. The market moves this morning and in recent weeks suggest a serious look should be taken at the approach to market-sensitive forecast information.”
A Treasury spokesperson stated: “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.”
Want to be regularly updated with mortgage news and features? Get exclusive interviews, breaking news, and industry events in your inbox – subscribe to our FREE daily newsletter. You can also follow us on Facebook, X (formerly Twitter), and LinkedIn.
