Reeves’s Tax U-Turn Triggers Fresh Jitters in UK Markets

Published: 14 November 2025. The English Chronicle Desk. The English Chronicle Online.

Financial markets reacted sharply on Friday morning after the chancellor, Rachel Reeves, abandoned plans to raise income tax in the upcoming budget, prompting renewed concerns about the government’s fiscal strategy and its grip on economic stability. Within hours of the surprise U-turn, UK borrowing costs rose at their fastest pace in more than four months, while the pound fell against the dollar in early trading – a signal that investors remain unsure about the direction of government policy at a moment of acute fiscal pressure.

Interest rates on government bonds, known as gilts, spiked by more than ten basis points shortly after the markets opened, placing them on track for their steepest one-day climb since 2 July. That date has become a reference point in financial circles, marking the moment when investors were jolted by Reeves’s tearful appearance in the House of Commons as she warned that Britain was entering a period of “difficult and unavoidable choices.” On Friday, the markets seemed to give their verdict on the latest shift in the government’s position: uncertainty is back, and confidence remains fragile.

The pound also weakened, falling by around half a percent against the US dollar. Currency analysts said the decline reflected not only concern about the government’s short-term fiscal strategy but also broader questions about the coherence of its long-term economic vision. Many had expected Reeves to follow through on her previously signalled willingness to break key manifesto commitments in pursuit of what she called “fiscal credibility.” Instead, after weeks of speculation, she reversed course at the last moment, raising doubts about her determination to confront the scale of the country’s budgetary challenges.

According to senior government sources, the chancellor made the decision after receiving updated economic forecasts from the Office for Budget Responsibility. The new projections were said to be marginally more optimistic than those previously anticipated, giving the Treasury slightly more fiscal headroom. But the timing of the decision – reportedly taken on Wednesday evening, just before the deadline for major budget revisions – has intensified scrutiny of both the government’s political calculations and the power dynamics within Downing Street. It has also highlighted once again the tensions between the prime minister and senior members of his team, who have spent the week batting away accusations of internal briefings, leadership anxieties and attempts to undermine cabinet colleagues.

Investors, however, appeared unmoved by the government’s insistence that the budget would still meet its fiscal targets. Kathleen Brooks, research director at the brokerage XTB, said the reaction was a warning shot from the bond markets. She argued that the chancellor had attempted to balance political sensitivity with economic reality – and the result was a shift that satisfied neither. In her view, the markets are sceptical that the government can continue promising significant investment in public services while maintaining a narrow tax base.

Bond traders, she said, “are sending a very clear message that they expect a broader tax strategy, not an avoidance of politically challenging decisions.” Markets, she added, “do not believe that the government can rely solely on small tax rises and increased borrowing to fund its spending commitments.” Her comments echoed a growing consensus among economists that smaller, targeted tax increases may prove more economically disruptive than a single, broadly applied rise in income tax, and that they carry greater political risk because they inflame a wider range of interest groups.

For weeks, Reeves had been preparing both her party and the public for the possibility of breaking her pledge not to raise income tax. She had convened briefings with Labour backbenchers and invited external experts to outline the fiscal pressures the government faces. Earlier this week, she told BBC Radio 5 Live that it would in theory be possible to maintain all manifesto tax commitments, but doing so would require “deep cuts in capital spending” – a prospect widely viewed as incompatible with economic growth and the government’s promises to rebuild public services.

But on Wednesday afternoon, Reeves and the prime minister, Keir Starmer, chose to abandon the plan. Instead, the chancellor will now focus on a patchwork of smaller tax rises – a shift that marks a decisive political move to preserve manifesto integrity, even at the risk of market unease. Sources close to the Treasury described the move as a “difficult balancing act” between economic responsibility and political survival.

The government has spent the past several days attempting to reframe the U-turn as a demonstration of the chancellor’s integrity rather than indecision. Lisa Nandy, the culture secretary, argued on Friday that the decision showed Reeves’s commitment to protecting public trust. In a broadcast interview, Nandy insisted that the chancellor “takes her promises seriously” and would not “play fast and loose with people’s money.” Her comments appeared crafted to stabilise public perception at a moment when pressure was mounting on the prime minister’s leadership amid allegations of internal briefings against the health secretary, Wes Streeting.

Streeting himself, speaking on LBC, distanced his remarks from the internal tensions, but he reinforced the importance of honouring manifesto commitments. Trust in politics, he said, was already low, and breaking promises would only exacerbate public disillusionment. His comments were seen by some as a subtle but pointed reminder of the cost of political volatility at a time of national economic fragility.

Despite the government’s attempts to shift the narrative, economists have warned that replacing a single income tax rise with multiple targeted tax increases may create challenges of its own. Ben Zaranko, associate director at the Institute for Fiscal Studies, noted that the strategy carries “considerable risks.” In a post on X, he pointed out that revenue generated through smaller, less visible taxes tends to be more uncertain, and that such measures often fuel public frustration, especially when they affect narrow interest groups. This, in turn, can make future U-turns more likely, reducing the credibility of government policy. He also warned that investors may view the approach as less stable than a straightforward income tax rise, potentially deepening concerns about the UK’s fiscal trajectory.

Within financial markets, Friday’s movements were widely interpreted as evidence of a deeper concern: that Britain may be struggling to demonstrate fiscal consistency after several years of political turnover and economic shocks. While the global economic climate is calmer than during the turbulence of 2022, the lingering legacy of that crisis continues to shape investor psychology. Many now argue that even the appearance of indecision can unsettle markets, particularly when the government faces a significant budget deficit, rising debt interest payments and ongoing pressure to invest in public infrastructure, health and social services.

The chancellor will present her budget in less than two weeks, and the stakes could hardly be higher. Investors, economists and political commentators will be watching closely to see whether Reeves can restore the confidence that wavered on Friday. Her challenge will be to demonstrate that her revised tax plan is not a retreat from fiscal discipline but a sustainable strategy capable of supporting growth while maintaining the government’s promises to voters.

For now, the reaction provides a sobering reminder of the delicate balance the government must strike. The markets may have spoken loudly today, but the political consequences of either course – raising income taxes or abandoning the idea – are equally fraught. Between economic pressure and electoral promise lies the narrow path the chancellor must now navigate, with the credibility of both her leadership and the government’s fiscal plan hanging in the balance.