At 8.15 yesterday morning Rachel Reeves did something that no chancellor of the exchequer has ever done before, interrupted morning TV to give a warning about the state of UK finances, effectively laying the groundwork for tax rises in the Budget now 20 days away.
The immediate response was good news for her as UK government bonds strengthened, cutting the cost of borrowing, as the bond markets welcomed what they may see as a fiscally responsible approach. But it will still be an unequivocal manifesto promise broken.
Reeves may be assuming that with 2½ years to a general election there is plenty of time to repair the damage, but it was immediate bad news for sterling which fell even further against just about all currencies. That included 0.75% down against the US dollar and another 0.40% against the euro, to a new 31-month low.
In her somewhat unspecific warning ahead of the Budget, tax rises were not actually mentioned, but saying “we all need to do our bit” suggests they will not just be aimed at the wealthiest. A rise in basic rate income tax rise would be the first in 50 years, but it could be matched by an equivalent fall in national insurance, which would shift the tax rise onto higher-income pensioners, landlords and others.
Also pure speculation, but damaging to the pound, the markets are starting to price in a cut in interest rates from the Bank of England (BoE) tomorrow. Most still think the Monetary Policy Committee (MPC) will stick on 4% for now and await the impact of the Budget, but with inflation heading downwards and unemployment up the MPC vote will be on a knife-edge.
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