The UK chancellor laid the groundwork for tax hikes in her pre-Budget speech this morning (4 November) but refused to be drawn on details.
Ahead of her second Budget as chancellor on 26 November, Rachel Reeves said she will “make the choices necessary to deliver strong foundations for our economy”.
“As I take my decisions on both tax and spend I will do what is necessary to protect families from high inflation and interest rates, to protect our public services from a return to austerity, and to ensure that the economy that we hand down to future generations is secure, with debt under control,” she said.
“When I was appointed chancellor, people put their faith in me to take our country forward…not to always do what is popular, but to do what is right,” she added.
Dan Coatsworth, head of markets at AJ Bell, said the speech “left investors with more questions than answers” and has “done nothing to remove uncertainty around taxes”, adding that Reeves “batted away questions about taxes faster than an Olympic table tennis player”.
“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,” he said.
“It was telling that the 10-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.”
He added: “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.”
Charlotte Kennedy, chartered financial planner at Rathbones, said the speech “effectively lays the groundwork for tax rises, seemingly intended to soften the blow at the end of the long run-up to the Budget,” but added “it’s important to avoid knee-jerk reactions based on speculation”.
Steve Clayton, head of equity funds, Hargreaves Lansdown, said Reeves had “surprised no-one by refusing to rule out tax rises”, adding that she was trying to get markets onside by promising to go faster and further to deliver growth.
“Reeves wants growth to boost revenues and ease the debt constraints, but those constraints are very real and give her little room for manoeuvre,” he said.
“Markets know this, which is why there has been very little reaction to the speech, given it revealed little of substance. Equities were under pressure already this morning and the FTSE remains 70 points or 0.7% lower. Gilt yields have improved by about 2 basis points, in common with European bond yields, while sterling has barely budged.”
Lindsay James, investment strategist at Quilter, said Reeves had “effectively confirmed that significant tax rises are needed”.
“Economists and industry commentators have by and large come to the same conclusion, which is that the estimated £20-£40bn hole in the public finances is too large to be closed with tinkering and the chancellor is likely to have to raise at least one of the three main taxes of income tax, NI and VAT, which account for around 60% of the UK tax base.”
She added: “Tax rises historically dampen economic growth, so it is a balancing act that is difficult to achieve and fraught with risk, and may not actually work in extracting the public finances out of this predicament.”
