Chancellor Rachel Reeves surprised markets with an impromptu speech ahead of the delivery of the Autumn Budget on 26 November, paving the way for manifesto-breaking tax hikes.
Speaking from Downing Street this morning, the chancellor hinted she would be making painful decisions later this month, peppering her speech with plenty of talk on values and doing what is right for the British people, not what is popular.
She did confirm that the choices made in the 2025 Budget will be focused on getting inflation falling by creating the conditions for interest rate cuts to support economic growth and improve the cost of living.
Dan Coatsworth, head of markets at AJ Bell, said: “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.
“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.”
However, tax rises seem inevitable, marking a potential breach of Labour’s 2024 manifesto pledge not to raise taxes on working people. As pointed out by Reeves herself, the UK’s national debt stands at £2.9trn – equivalent to 95% of GDP – and the UK has the higher borrowing costs of any G7 country, with £1 of every £10 of taxpayer money spent on debt interest.
Coatsworth said 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 10-year gilt yield fell as Reeves began her speech, indicating that bond investors thought we would get confirmation that taxes would go up at the Budget,” he said.
“But as it became clear that Reeves was merely dancing around the topic, yields went back up.”
Laying the groundwork for the tough decisions she alluded to throughout her speech, Reeves noted that, since last year’s Budget, “the world has thrown even more challenges our way”, pointing to the continual threat of tariffs dragging on global confidence, in particular, arguing this has deterred business investment and dampened growth.
“Inflation has been too slow to come down as supply chains continue to be volatile, meaning that the cost of everyday essentials remains too high,” she added.
“And the cost of government borrowing has increased around the world – a shift that Britain has been particularly exposed to.”
Later this month, the Office for Budget Responsibility (OBR) will also set out the conclusions of its review on the supply side of the UK economy.
Although Reeves said she would not pre-empt those conclusions, she acknowledged that “productivity performance is weaker than previously thought”.
She added that OBR forecasts are “not visions of the future [but] a look in the rear-view mirror”.
“When I was appointed chancellor, people put their faith in me to take our country forward, not to be swayed by political convenience, not to always do what is popular, but to do what is right,” said Reeves.
“As I take my decisions of 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.”